Investors should be using the recent market rout as an equity buying opportunity, according to Psigma’s Tom Becket, who says sentiment indicators show the world has officially moved into largely unjustified panic territory. 
Last week was the one of the worst starts to the year on record for the FTSE and the Dow Jones, among others, as increased geo-political tensions and calamity in China’s domestic market caused global stocks to tumble.
Not only is the situation worsening between Saudi Arabia and Iran and investors are still reeling from China’s circuit breaker mechanism’s implication twice last week, but concerns have risen regarding a manufacturing recession in the US and now $31 a barrel oil.
All told, it means all major equity indices (apart from Japanese equities) are down more than 4 per cent over the year to date.
Performance of indices in 2016
Source: FE Analytics
This increased volatility and the worsening sentiment towards risk assets has meant many fund managers are looking to sandbag their portfolios against further losses. In articles this morning, for example, FE Trustnet showed that a number of FE Alpha Managers have been increasing their cash levels while Standard Life’s Thomas Moore urged investors to remain cautious.
However, given the extent of the falls, Becket – chief investment officer at Psigma – says market negativity has moved too far too fast. As a result, he and his team have been putting money back into equities to take advantage of a contrarian buying opportunity.
“Do things get better from here? One thing I would say is that certainly in the 13 years that I’ve been investing, I’ve rarely known there to be so much pessimism – particularly on the sell-side which is normally uniformly optimistic,” Becket (pictured) said.
“Now, whenever you pick up the national press or indeed broker notes they are, at this point in time, really, really bearish.”
“I would say, from a sentiment perspective, particularly on a short-term basis, markets look quite oversold. Sentiment has taken a severe kicking and anyone who was thinking we might have seen the peaks in the UK and US market now believe that is the case. I believe, on a short-term basis, contrarian positive equity performance could take place.”
He added: “In our view, a short-term rally will take place but how long that lasts is obviously the question that investors will want answering.”
Becket admits it is almost impossible to call, but points out that there are number of reasons why the uber-bearish concerns about an economic-meltdown are far-fetched.
For example, while not spectacular, Becket says that global growth will be solid over the year ahead, which should aid better equity returns.
China is clearly the main source of woe for investors at the moment and though Becket agrees that the situation in the world’s second largest economy is a concern, the negative view has been overdone yet again.
Firstly, he says the slowdown in growth is all part of the authorities’ very well telegraphed shift to a new and sustainable economic model that relies on consumerism rather than investment.
Secondly, he says fiscal and monetary stimulus from China’s central bank will soon stabilise the economy.
Thirdly, he points out that while falls within the domestic equity market do little for global sentiment, it has historically had no effect on Chinese consumer spending whatsoever.
However, if investors want to be bearish, Becket says they can be concerned about certain sovereign wealth funds de-leveraging due to falling commodity prices. However, he notes these risks are hard to quantify and therefore, all and all, now is the time be positive on markets rather than negative.
Credit Suisse Equity Sentiment Indicator
Source: Credit Suisse
“Why have we increased our equity exposure this morning? The Credit Suisse Global Equity Sentiment Indicator (which shows you good buying opportunities and good selling opportunities via panic and euphoria) and I think at this point in time it’s fair to say it shows the world is panicking,” Becket said.
“That probably leads to a short-term buying opportunity. Our view on equities is that they will make headway this year, but you are in a situation where you will continue to see lower highs than previously and we are still very much in a sell-the-rallies mentality.”
In terms of favoured equity markets, the team at Psigma is currently overweight Europe and Japan in their client portfolios and are looking to go overweight emerging markets over the coming months.
However, it is negative on the US given its high valuations and sanguine on the prospects for the UK.
While it backs regional funds, Daniel Adams – senior investment analyst at group – says one of the favoured portfolios is R&M World Recovery.
“Within equities, we see a dichotomy at the moment between value stocks which have de-rated quite significantly and, on the other side, we have the ‘expensive defensives’ that have really performed well and investors have flocked to for safety and income,” Adams said.
Performance of indices over 3yrs
Source: FE Analytics
“We are playing this through the R&M World Recovery fund. The reason we like it is because it is very nimble [and] it’s principally focused on the three areas of value we find in markets at the moment – emerging markets, Europe and Japan.”
“Hugh Sergeant has an extremely strong track record and, given our prognosis of markets, we think investors will shift out of expensive defensives and into more value stocks.”
“A similar trend happened in 2013 and this strategy hugely outperformed and we would expect a similar return profile going forward.”
Since its launch in March 2013, the £166m R&M World Recovery fund has been a top quartile performer in the competitive IA Global sector with gains of 35.94 per cent. As a result, it has more than doubled the returns of its MSCI AC World index.
Performance of fund versus sector and index since launch
Source: FE Analytics
That being said, it has also been one of the most volatile.
FE data shows that while it raced ahead of the sector and index in 2013 with returns of more than 40 per cent, it lost 3 per cent in 2014 and delivered a maximum drawdown of 16 per cent in 2015. The fund’s largest sector weightings are financials, consumer products and industrials.