Investors are wrong to be overly cautious in the current market, according to AXA IM’s Jamie Forbes-Wilson, who argues that most bearish views stem from the naïve belief that “what goes up must come down”.
The financial press has been awash with bearish comments over recent weeks and months and, on the face of it, the argument for being pessimistic on financial markets seems to have validity.
First of all, the rally in equities is now well into its sixth year with the likes of the S&P 500 and the FTSE All Share delivering respective gains (which have largely been driven by low rates and quantitative easing) of more than 200 per cent and 150 per cent since they bottomed after the financial crisis in March 2009.
Performance of indices since Mar 2009
Source: FE Analytics
On top of that, there are more pressing concerns surrounding Greece’s future in the eurozone, the Chinese market (which had been in freefall over recent weeks), generally high valuations and the growing possibility of a rate hike here and across the Atlantic before 2016.
These headwinds, according to the latest Bank of America Merrill Lynch survey, have culminated in fund managers running similar cash balances to those that were last seen when Lehman Brother’s collapsed – which of course sparked the biggest crash since late 1920s.
Performance of indices immediately after Lehman’s collapse
Source: FE Analytics
However Forbes-Wilson, manager of the AXA Framlington Blue Chip Equity Income fund, says those managers calling the top of the market have got it all wrong as they aren’t taking into account what is actually going on at both corporate and economic levels.
“I can see why people are [raising cash], but I don’t agree with it,” Forbes-Wilson said.
The manager agrees that valuations are higher than they have been, but says there are a number of strong factors which will continue to drive the market forward.
Firstly, he says companies that are awash with cash are only looking for some sort of certainty (largely surrounding Greece) to increase their capital expenditure and M&A activity. When that happens, those holding cash will find it very “uncomfortable”.
“The balance of probability suggests that markets will go up rather than down. People have been calling the top of the market over last few months but in the context of already weak oil and commodity prices, huge amounts of cash in the system and M&A activity, I don’t think that is the case.”
All told, Forbes-Wilson says the large majority of bearish sentiment stems from people’s experiences during the global financial crisis and the increasingly naïve view that what goes up must come down.
“I totally understand why people are cautious as equities have performed extremely well over recent years,” Forbes-Wilson said.
“However, I think everyone still has this niggling hangover from the global financial crisis. Everybody has the feeling that just because something has gone up, it must come down. But, I haven’t seen any reason for that given global growth is improving, the UK economy is in better shape and corporates are strengthening.”
The likes of FE Alpha Manager Jan Luthman have a similar view to Forbes-Wilson as the Liontrust manager says a bubble will burst one day, but with so much central bank stimulus still in the system there is no reason why equities can’t continue to rally.
“The main point is, where else do you go? I don’t think investors are ignoring the dangers of the world but they are just being swept along by a tidal wave of liquidity. The blunt answer is, there ain’t any other game in town,” Luthman said.
There have certainly been plenty of risks occupying investors’ minds over recent months, with the bursting of China’s A-share market (which has meant the Shanghai Exchange Composite has fallen 27 per cent since its peak in June) and Greece’s debt negotiations – which have seemingly been resolved for now albeit to the detriment of the Greek people.
Performance of indices over 3 months
Source: FE Analytics
Many view the recent heightened volatility as an ominous sign of things to come, such as Aberdeen’s Bruce Stout.
“Stretched and illogical valuations usually always lead to capital destruction regardless of prevailing short-term justifications, thus great care must continue to be exercised in such an alien investment environment to preserve capital,” Stout said.
However, Forbes-Wilson is confident the UK equity market – which is currently up 6.8 per cent year to date – can make decent gains throughout the rest of the year following the recent correction.
“It is likely that macro news will continue to drive the market over the summer months. Markets will ebb and flow on the latest Greek update or on statements from Janet Yellen. Valuations are higher than they have been so they are now much more fair value, which means we have to scratch a little harder for opportunities.”
“However, with capital still very cheap, the underlying global economy in OK shape and the UK economy improving, there are reasons to be positive. If we can find a way to put the situation in Greece to bed, it sets us up for the autumn earnings season in good shape so we are feeling quite confident.”
Of course, there is the possibility that both the US and the UK may start raising interest rates before the end of the year (possibly even as early as September), which many feel could cause a “brutal” sell-off in both bonds and equities.
However, this still doesn’t worry Forbes-Wilson. While he admits the biggest risk to equity markets is if a hike in rates were to create a “disorderly” sell-off in fixed income, he says the chances of that are very low.
The reason for that is because Forbes-Wilson – whose £80m fund has outperformed both the IA UK Equity Income sector and the FTSE All Share since its launch in February 2009 – says that not only are markets priced for a rise in interest rates, but central bankers’ credibility is on the line if they mess up monetary policy.
Performance of fund versus sector and index since launch
Source: FE Analytics
“The exact timing of a Fed rate rise, whether it is September, October, December, is pretty irrelevant,” he said.
“The point is, [rate hikes] have been so well flagged and we still have very accommodative monetary policy elsewhere in the world. A modest increase in equity markets is utterly manageable for equity markets.”
He added: “The other point is that the burden of debt has been shifted from corporates to governments so the authorities are incentivised to keep markets in order.”
