The pain facing UK equities in 2016 is likely to be front-loaded, according to star manager Richard Buxton, who says funds focusing on FTSE-listed stocks will recover from what has been a relatively disastrous start to the year.
According to FE Analytics, the FTSE All Share is down some 6 per cent already this year following increased concerns surrounding the outlook for China’s economy and significant falls in price of oil and other commodities.
This is part of a longer term theme though, as the FTSE 100 index is now down 17 per cent in price terms (15 per cent with dividends reinvested) since its peak in April last year as the internationally-facing blue-chip index has been battered by all manner of macroeconomic headwinds.
Price and total return performance of index since April 2015
Source: FE Analytics
Given the sharpness of the falls already this year and the accompanying bearish comments from parts of the industry, many investors are concerned this may be a prelude to an even more sinister event and are therefore looking to de-risk their portfolios.
Buxton, who is chief executive at Old Mutual Global Investors and manager of the group’s flagship £2.4bn UK Alpha fund, urges investors not to panic, lock in losses and therefore miss out on a likely market recovery. 
He argues that the recent falls have been driven by sentiment rather than anything else, predicting a recovery rally is around the corner.
“A harsh start to 2016 but the pain is likely to be front-end loaded rather than persist throughout the year,” Buxton (pictured) said.
“Within a relatively short period, investors will get a better sense of how the authorities will respond to market falls and the economic outlook. Fed policy will be clearer. Investors may be reassured that the Chinese authorities have not lost control of their currency and that fears of a credit-induced hard landing are overdone.”
“A focus on the medium term is essential, as after a painful beginning, markets are likely to recover during the balance of the year.”
Of course, Buxton has become increasingly renowned for his bullish outlook over recent years – stating on a number of occasions that equities are in the “foothills” of an extended bull market.
That being said, the former Schroders manager is fully cognisant of the risks that have so far plagued markets in 2016.
“For investors the wider question is this: are we in the grip of a sharp correction, or do the falls we’ve seen year to date represent the official rolling over of the bull market which, in terms of length, has far exceeded its long-term average?”
Performance of index since the global financial crisis
Source: FE Analytics
“Never before have we seen such a rate of deceleration in US manufacturing without an accompanying recession.”
“And yet the polarisation between declining industrial production on the one hand, not just in the US but throughout much of the Western world, and the relative buoyancy of consumption and employment data is puzzling to say the least. It also begs the question as to what extent will industrial weakness infect broader corporate sector confidence, and sap consumer appetites?”
However, Buxton is confident that UK economic growth will remain relatively robust and that while the potential for a ‘Brexit’ will cause uncertainty up to the date of the referendum, the UK will not leave the European Union. He also believes monetary policy in the UK will remain supportive.
Nick Mustoe, chief investment officer at Invesco Perpetual, also says that the recent bearish commentary (such as the RBS note which urged investors to liquidate all their assets) has been hugely overblown.
“The RBS report came out a few days ago and it got an awful lot of press attention. I certainly don’t share this view,” Mustoe said.
“I think that there are, as I said, a number of very attractive equities. I think that, as I said earlier, it is rather like 1987, where the big drawdowns that we see are major buying opportunities. They never feel like it on the day but, when you look back, you realise, actually, that that was the time to take a longer view on equities so I don’t agree with the RBS report which in my view is short-term sensational.”
Performance of index since 1987
Source: FE Analytics
On the other end of the scale, however, notable market bear Bruce Stout – manager of the popular Murray International trust – believes the outlook for risk assets will continue to worsen.
“The lack of meaningful economic traction throughout the heavily indebted developed world continues to raise the spectre of debt deflation,” Stout said.
“Having exhausted virtually all orthodox and non-orthodox monetary and fiscal policy options over the past five years, central bankers now find themselves increasingly impotent to influence economic challenges that lie ahead.”
It must also be noted that Buxton was one of the worst hit UK managers during last year’s falls, largely as a result of his large-cap value bias.
While 2015 turned out to be a good year for the ‘average’ active manager in the UK sectors, Buxton’s process led him to chunky weightings to bombed-out large-caps such as banks and oil companies, which went on to fall even further.
It meant his Old Mutual UK Alpha fund ended last year in the IA UK All Companies sector’s bottom decile with losses of 2.5 per cent.
While the fund is still outperforming both its peers and the FTSE All Share since he took charge in December 2009, the graph below just how painful the last 12 months or so have been for Buxton from a relative perspective.
Performance of fund versus sector and index under Buxton
Source: FE Analytics
Despite this, Buxton is confident that a value tilt is the best way to access UK equities given the negative sentiment and recent falls.
“Value stocks, recovery stocks, commodity stocks, mega-cap stocks – if it doesn’t have positive earnings momentum, investors just do not want to know,” Buxton said.
“And yet we are reaching a point where I believe investor enthusiasm for expensive growth stocks is reaching a dangerous level, whereas the current aversion to large cap value is a distinct opportunity.”
“While investors increasingly question the sustainability of dividend payments in some resource stocks, given the current level of the oil price, there is value to be found in big oil, notably BP and Shell. You can if you wish ignore the protestations of management that the dividends will be held, assume pay-outs are halved and yet still find yields attractive relative to bonds or other equities.”
