Investors need to stop viewing the current financial and economic backdrop through “2008 lenses”, according to FE Alpha Manager Stuart Mitchell, who believes concerns surrounding another crash are overblown and wide of the mark. 
Macroeconomic headwinds such as China’s growth slowdown, falling commodity prices and fears of a policy error on the part of the US Federal Reserve have weighed heavily on investor sentiment over recent months.
This financial stress also started to hurt banking shares, similar to during the global financial crisis in 2008, as fears of contagion from the beaten-up energy sector and the impact of negative interest rates sparked selling within the already disliked sector.
According to FE Analytics, the likes of the MSCI AC World index have posted (while not severe, but highly volatile) losses this year while banks have fallen more than 12 per cent– including an 8 per cent slide in just a matter of days earlier this month.
At the same time, gold and government bonds have rallied, highlighting the flight to safety among investors.
Performance of indices in 2016
Source: FE Analytics
However Mitchell, who is managing partner and chief investment officer at S.W. Mitchell as well as manager of a number of open-ended funds, says fears of a financial crash are over-exaggerated and is therefore maintaining relatively ‘risk-on’ portfolios – such as a high weighting to banks.
“To stock-pickers, the whole idea [of a collapse in the banking sector] seems to be completely mad,” Mitchell said.
“We’ve seen Lloyds is up 15 per cent today because the numbers were what we were expecting but they seemed to have surprised a lot of people and Commerzbank was up 20 per cent last week because, again, the numbers were what we were expecting but surprised a lot of people.”
“The problem is everyone is still seeing things through 2008 lenses and there is this terror that if the economy does slowdown a little bit then the banks are going to have all the same kind of problems that they had in 2009, 2010 and 2011 – which we think is pretty unlikely.”
He added: “Banks have three times as much capital now as they did in 2008.”
While he admits there are questions marks over net interest margins in a low interest rate environment, he says most analysts are completely missing the fact the banks – such as Lloyds – have revised up their targets for the coming 12 months.
On top of that, he points out that the number of non-performing loans have fallen considerably and that recent stress tests have been aggressive enough to show how strong the banking sector really is.
“If we did go into a recession, then we wouldn’t want to own banks. But I’ve been doing this for so long and I always think the market predicts 20 for every one recession we actually see,” Mitchell said.
“People are already so nervous and so my guess is that we will all be a bit surprised about growth, certainly in Europe.”
Indeed, Mitchell started his career in 1987 with Morgan Grenfell Asset Management before going on to hold to be head European equities at the group and responsible for $30bn of assets (the largest in Europe at the time).
He also ran funds at Odey and Waverton (formerly JO Hambro Investment Managament) before setting up on his own in 2005.
According to FE Analytics, the FE Alpha Manager has returned 216.02 per cent since the turn of the century, beating his peer group composite by more than 160 percentage points in the process.
Performance of Mitchell versus peer group composite since Jan 2000
Source: FE Analytics
Given he was worked through markets such as 1987’s ‘Black Monday’, the bursting of the ‘dotcom’ bubble and the global financial crisis, he says the levels of bearishness in the market – as shown by cash weightings from the likes of BofA Merrill Lynch Fund Manager Survey – look overdone as the current backdrop isn’t akin to a pre-crash environment.
“It’s interesting. Normally, in my experience, the big bear markets happen when everyone is very enthusiastic and optimistic. People are already extraordinarily bearish. Clients of mine used to have 50 to 60 per cent in equities, now they have 5 per cent.”
“It’s just a completely different world to what we have known in the past. I think by the end of this year markets will be nicely up.”
One of the nuances of the current backdrop, however, is the argument that bearish investors could actually create the financial meltdown they have been so fearful of by continuously forcing down share prices and therefore impacting corporate activity.
Mitchell says it is an interesting dynamic, but argues market bears don’t have the ability to force the average consumer to stop spending.
“There is a direct link between investment spending, but the market stress has to be around for a prolonged period of time before corporate spend is affected. We’ve only had stress conditions for the last four/five weeks.
“But on a domestic lending side, which is the most important part as its 70 per cent of all lending, there is no link at all. The average person, unless they are in our industry, has no idea what the market is doing.”
Mitchell says the bull market in equities, which started in March 2009 but has certainly showed signs of faltering of late, has at least another year left to run until a US-led growth slowdown begins to bite.
Performance of index since March 2009
Source: FE Analytics
As such, he is maintaining a relatively bullish portfolio and opting not to use his ability to short in his funds.
“I just think it is too early to call the end of the bull market and I think it is too difficult to short things at the moment,” he said. “The trouble is, the type of companies that have been falling are dangerous to short as they are oil and gas and commodities, and who the hell can predict that?”
“Then there is the EM-exposed stuff and it’s very difficult to short them because they are good companies. Like Nestle, for instance. I think the earnings forecasts are too high but do I really want to short Nestle, which is one of the finest companies in the world? Probably not.”
“For all the other parts, interest costs have never been so low, the economy is recovering, M&A is picking up and it’s just very, very dangerous to be shorting.”
