The six-year global bull market is unlikely to end anytime soon, according to Lazard’s Alan Custis (pictured), who argues that growth prospects across regions are roughly in-line for the first time since the financial crisis. 
As such, he favours cyclical and recovery stocks over stable ‘stalwart’ stocks, with a particular sector preference for financials which account for almost a third of his Lazard UK Omega fund’s portfolio.
“We think the backdrop is going to be quite constructive for equities, so we don’t think – having had a six-year bull market – that we’re about to pull up stumps,” the head of UK equities said.
“A lot of people do. We’ve had a six-year bull market, therefore we’re now going to go into a recession. I think the cycle has been elongated because we came from such a low base and it’s been anaemic because asset prices have largely been supported by central bank intervention.
“We’re now in a situation where that spectrum of deflation seems to have disappeared. We’re seeing inflationary expectations go up in most developed countries now.
“I think the backdrop for equities broadly is pretty positive and I think we have a number of years to run before we roll over the other side into recessionary conditions.”
Over the last nine years from 2008, the FTSE 100 index is up 80.5 per cent while the MSCI World index is up 138.42 per cent. On an annual basis, the only individual year that both indices made a loss was 2011, largely as a result of the European debt crisis.
Meanwhile, bond yields have continued falling, with 10-year gilt yields down 73.09 per cent over the same time frame.
Performance of indices over 9yrs
Source: FE Analytics
However, yields have started to rise again recently following expectations for increased inflation and potential rate hikes across most developed countries.
Given this, and the subsequent market rotation from quality growth into value stocks during the second half of last year, some industry professionals have warned that the economic cycle is coming to an end.
“The market feels very difficult again for some reason. I think there are two schools of thought at the moment that are weighing on the market and it seems to be a fairly even split,” Custis explained.
“There are those saying that growth is going to be hard to come by, that Trump won’t actually do anything, that M1 lending in China is suggesting a slowdown in Chinese growth, that interest rates going up in the US is going to be a bad thing, and therefore, when we were talking about the demise of the consumer staples trade, there has been no demise at all of that.
“In fact, if you look – obviously aided and abetted by the Kraft/Heinz opportunistic approach to Unilever last month - all those stocks have achieved a double-digit performance year-to-date.
“So everyone says the consumer has rolled over but they haven’t at all. They may have underperformed a bit on a relative basis and that was obviously through the latter part of last year, but this year they’ve been very strong.
“I think that’s the manifestation. That half of the market are saying they have concerns about global growth and therefore they express it by buying what we would regard as pretty fully-valued stocks because they don’t believe that bond yields are going to go up in any shape or form.”
The manager says that the other half – which is the camp the UK equities team at Lazard sits in – believes that we are experiencing synchronised global growth for the first time in several years.
He says European economic data is improving, the UK has weathered the shock of Brexit well and the US also offers attractive fundamentals. He says the outlook for Chinese growth is strong, given its five-year social and economic development plans.
“For the first time since the global financial crisis, we think most global economies are broadly pointing in the same direction,” Custis continued. “With that as a backdrop, it’s difficult to think that 10-year bond yields will stay down at these levels, whether it be European, whether it be in the UK or in the US.
“Therefore, we’re still minded to be in the more cyclical recovery-type trade than the staples, ‘world is about to end’ trade.
“There is a real bifurcation in the market at the moment. Some days the miners go up and the next day the miners go down, Unilever goes up and Unilever goes down: it’s on-off almost on a daily basis. I don’t know what is going to break the log jam.”
In terms of sectors, the manager is currently seeing the best opportunities in large-cap financials. In his four crown-rated Lazard UK Omega fund, he holds 28.5 per cent in financials compared to the FTSE All Share’s 25.7 per cent weighting.
While he believes banks can offer investors strong opportunities and holds the likes of Barclays and Lloyds in his top 10 holdings, he warns against seeing them as cure-all, long-term holdings.
“I would love to believe that but I don’t at all,” Custis said. “I think that regulation just continues to increase for them. The number of people you find in the compliance departments of banks has just gone up and up.
“It’s not revenue-producing frankly, and obviously governments and regulators have used the banking system as an ATM for the last 10 years. Does that stop? Does that continue?
“Obviously we have Barclays who are still trying to negotiate with the DoJ [US Department of Justice] with mortgage mis-selling. They’ve refused at this stage to settle.”
The manager remains unconvinced that regulators have accepted the need for a robust banking industry to support economic growth. He also expects compliance costs to increase in the sector and, as such, while he believes there is significant upside to be had in the sector, he warns that those with exposure to banks need to carefully monitor their holdings.
“The reason why banks trade on a price-earnings ratio of 10 is because they’re deeply cyclical. You’ll make good money over nine years and lose it all on the tenth year; that’s what historically they’ve always done. Banks should never be on 15 times earnings, they should never be on two times book value,” Custis said.
“I remember back in the day when Lloyds was making a 20 to 22 per cent ROE and was trading on 4 times book, I don’t think we will ever, ever see that again. I think you buy banks cheap and you certainly don’t hold them when they get reasonably fully-valued.
“I think the capital positon of the banks is fairly robust now, notwithstanding the Pillar 2 processes, the pension issue, and that PPI is now time-barred out until August 2019 – we thought that was going to be sooner. So Barclays and Lloyds have to make another provision.
“Does PPI stop and do we go into package banking? Do we go onto the next thing and the next thing? Unfortunately, we have now let the PPI genie out of the bottle and now it’s just a ‘gimme, gimme’ society.”
Over five years, the £132m Lazard UK Omega fund has returned 75.37 per cent compared to its sector average and benchmark’s respective returns of 60.42 and 57.82 per cent. It has done so with a second-quartile Sharpe ratio (which measures risk-adjusted returns) and a third-quartile maximum drawdown (which measures the most potential money lost if bought and sold at the worst possible times).
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has a clean ongoing charges figure (OCF) of 0.8 per cent.