Investors should not expect a sustained recovery in global equities and should instead prepare for more volatility to come following the ‘Black Monday’ crash, according to Miton’s David Jane and Hawksmoor’s Jim Wood-Smith. 
While anyone buying into the correction that hit stock markets over the past few months may well have made some decent gains in recent weeks, the recovery for most equity markets is still some way off.
The best performing assets of late have been largely been some of the biggest casualties of the selling that has characterised markets since May: commodities and emerging markets.
Funds such as Angelos Damaskos’ MFM Junior Oils Trust, Robin Geffen’s Neptune Russia & Greater and BlackRock GF Emerging Europe are all up more than 20 per cent but are clearly operating in some of the most volatile areas of the markets.
Performance of funds since Black Monday
Source: FE Analytics
Jane (pictured), who is head of multi-asset at Miton and has managed the CF Miton Defensive Multi-Asset, CF Miton Cautious Multi-Asset and CF Miton Total Return funds since June 2014, is not expecting any of the more mainstream areas of the market to do nearly as well whilst being faced with plenty of risk.
He says he does not think funds such as those in the IA UK All Companies or IA UK Equity Income sectors, where less than one per cent have beaten their benchmarks since Black Monday, will see much upside for some time to come while being faced with tandem risk of further falls.
Performance of sector and index since Black Monday
Source: FE Analytics
“In summary, markets are in a difficult place, the data is deteriorating consistently and the narrative has become quite negative. Therefore, we remain very defensive, particularly avoiding those areas which are exposed to the parts of the economy which are clearly deteriorating,” he said.
“In terms of last week’s dramatic rally in underperforming indices from this year, such as natural resources companies or the Brazilian real, there seems to be a classic bear squeeze where all market participants have the same view and are short of the sector.”
“Clearly we have seen a substantial deterioration across a broad range of data points worldwide, ranging from economic releases through to company fundamentals. The narrative is keeping pace with this, market sentiment is clearly very nervous with heightened volatility.”
Performance of commodities since 29 September
Source: FE Analytics
Jane thinks that the rally in many assets, particularly those of such as mining and metals, has little do with an improvement in outlook and is instead being clouded by a more opaque trend.
“In these circumstance the effect of leverage can make even the slightest rally very painful and many are forced to close their short positions, leading to a dramatic and self-fulfilling rise. It is a common characteristic of bear markets, and in many ways confirms our view that we don’t want to get involved in those sectors until the data improves materially,” he said.
“All can change with new information, particularly in the form of central bank policy, but in the meantime we can see no reason to get overcommitted.”
Jane thinks this does not therefore presents much of an obvious buying opportunity unless this is an improvement in the underlying economic data.
“Any improvement might take the form of a change in central bank policy or company earnings, but without this we cannot see a compelling reason to change our defensive stance,” he said.
Jim Wood-Smith, head of research at Hawksmoor, also says there will be let-up over the rest of 2015 unless there is a marked improvement in growth numbers as well as other monetary measures, He is hiding out in absolute return funds and a broad bond portfolio as a result.
“The final quarter is traditionally one of the best for investment markets. 2015 may be the exception that proves this rule,” Wood-Smith said.
“Equity markets are unlikely to regain confidence until China can demonstrate that it is not a threat to global growth, nor until the path of American interest rates becomes clear, nor until emerging market currencies have stabilised, nor until estimates of corporate profitability start to rise. These are considerable headwinds to battle, but are not insurmountable.”
Wood-Smith thinks picking equity markets for “a quick snap-back” is a very risky strategy at present despite the temptation to enter areas such as the energy and commodities, and is instead looking for smaller “harder won” returns from absolute return and fixed income.
“Equity choices will need to stay highly selective, focused on our three pillars of value, quality and momentum. We have great confidence in our diversified bond exposure and our absolute return funds, both of which should continue to eke out small but highly valuable gains.”