The economic backdrop is more normal than it appears and equity prices have simultaneously fallen to “really exciting levels,” According to THS Partners’ Cato Stonex and Ali Miremadi.
The managers, who co-run international, European and continental growth and value portfolios, are currently positive on markets as a whole and believe there are plenty of attractively-priced opportunities for equity investors at the moment.
Market sentiment has been cautious over the last year due to fears surrounding a global growth slowdown and the collapse in commodity prices. This sentiment seems to have intensified since the start of the year, with the MSCI AC World index plunging into a bear market twice already to-date.
Performance of indices in 2016
Source: FE Analytics
Miremadi and Stonex, though, say that this negative investor sentiment is mismatched with the health of most major economies at the moment. 
“Markets right now are pricing in almost an apocalyptic view of the future - what they’re pricing in is very low rates across the world,” Miremadi (pictured) explained.
“The interpretation of that is rates are very low and we’re basically awash with savings that can’t earn any return, and therefore in that environment nobody wants to take risks. That’s what is happening in markets, and consequently the riskier part of the capital structure – equities - are being priced quite conservatively.”
While the manager says this outlook is possible and that occasionally things do go wrong, he thinks there is a far greater chance that we are simply in the throes of enduring an unusually shallow economic recovery in most regions.
In fact, he believes that in this environment, the only way to make your cash work and to provide returns is through buying into equities.
“There are clearly some places such as Brazil that aren’t doing terribly well but there are always places that aren’t doing terribly well,” Miremadi continued. “Broadly speaking, in the big chunks of the global economy such as Europe and America, things are basically okay.”
“So if things are in fact a bit more normal than they appear, what’s happening here is that equity prices have fallen to really exciting levels. We think that’s absolutely true in equities, but of course in terms of other people in the world who are unsure what to do with a large amount of cash in today’s environment, where are you going to go?”
“You literally get no money now if you put your money into Japanese government bonds. You get around 1.25 per cent in UK gilts for the next 10 years and 1.75 per cent in America, maybe a bit less. Property is extremely expensive in most places you want to live, unless you are very sensible and decide to live in the countryside in which case it’s far cheaper but nobody wants to do that.”
As such, he says that investors should consider buying shares while they are priced at modest levels, particularly in Japan and Europe. Not only are stocks in these regions trading on reasonably attractive valuations, he says that both countries are undergoing positive change that should benefit the end investor.
According to the managers’ research, approximately 85 per cent of large-cap European companies reported earnings growth last year – this is essentially all major companies in the region aside from those in the oil & gas and mining sectors.
“Normally it wouldn’t be very exciting to say that basically things are okay, but in an environment like this that’s a relatively bold view,” Ali added.
Other current tailwinds that both managers listed were improving economic growth, lower indebtedness, lower unemployment and technological improvement.
Not only does the latter allow for greater stock transparency, the managers say that businesses can improve their productivity and therefore boost profits through the use of e-commerce. 
In terms of economic growth, they point out that China is still growing at more than 6 per cent, which is still a reasonable level despite the fact it has slowed.
“Essentially you’ve got more and more people in the growth economies with improving living standards – India is now the fastest-growing economy in the world at 7 per cent plus,” Stonex (pictured) said.
“Also, because energy has such a huge impact on all the other problems in the world, when energy becomes cheaper which it has done, everything else becomes cheaper including food, transport… even staying warm becomes cheaper.”
“You’ve also got improvements in disease control. If you want to be cheerful there’s no end of reasons to be cheerful.”
The manager adds that the Fed’s rate hike in December last year is actually a positive factor as it suggests the US economy is robust. He believes that people are reducing risk in their portfolios because they are unsure how well the economy will cope without ultra-low interest rates, although he says that this has been amplified by crowd psychology.
“I think there’s a little funk in capital markets, and capital markets and investors are all about uncertainty. We had a taper tantrum two or so years ago when there was first talk of raising interest rates, and obviously the Fed raised rates in December and people are not quite sure how to see that,” he said.
“It’s psychological. People really hate to be on their own. They like to do what everybody else is doing, and so crowd psychology is a big thing in markets.”
If anything, Stonex warns that “mass psychosis in markets”, despite not being based on anything substantial, can be a self-fulfilling prophecy and if anything is a greater danger to the market than any of the headwinds focused on by mass media in recent months.
However, he says that when investor sentiment slumps it can often rebalance again and isn’t always a trigger for longer term turmoil.
“The Greek issue was a prime example of this – was Greece really going to cause a break-up of the euro and the end of the world? Despite the fact that people pointed out it’s a small economy and not that significant, for several weeks people thought it was a disaster,” he continued.
“At the moment there’s this panic around deflation and banks. People are throwing their arms up in the air and running around like headless chicken, and that happens.”
At the other end of the spectrum, Stonex says investors get swept up in crazes for certain stocks and sectors, which are often cyclical and can lead to investors losing vast amounts of money if they don’t implement their own due diligence and follow the masses instead.
While he believes that technological improvement is far more of a positive for investing than a negative, both managers point out that the ability to view other people’s thoughts and opinions for free at the touch of a button can also contribute to the creation of crowd psychology.
“Now we have two odd things – we have this seemingly very crystal clear communication, but also we have a very high level of sensitivity to capital markets and asset prices,” Ali said.
“Oil price down equals every market is down, and that demonstratively is not a fundamental relationship. It’s a coincidence in many respects, but it’s become something that is believed without looking at the fundamentals of what something means. For example, we get to fill our cars up for slightly less than £1 per litre in the UK and that’s a massive boost to the consumer, these are very important to look at.”
“Of course exporting nations suffer, but it’s a pretty great time to be in Japan or Europe. It’s an unusual period to be investing in, but fundamentals in the world broadly speaking are really quite good.”
