Fund manager: 'Why I am preparing for a bear market'

Suddenly, fund manager Peter Spiller, high priest at the altar of gloom for more than a decade, finds reason to be cheerful about what lies ahead.

But, if he is correct, this cheer will echo only with those with cash or highly liquid securities such as government bonds.

In short, he believes investors should prepare for a bear market sell-off, and be ready to take advantage of it.

For Spiller's investment criteria are value and safety - end of story. Thus his main defensive shield, CG Real Return, is predominantly invested in US inflation-linked Treasury bonds, alongside similar bonds from other foreign governments. "The fall in sterling after the Brexit vote has made heroes of us all," he says.

'Many things could go wrong'

In 2016 (to 1 December), CG Real Return gained 21.4%. His investment trust flagship, Capital Gearing, whose share price has risen an astonishing 175-fold (excluding reinvested dividends) since its 1982 launch, gained almost 14%.

Spiller believes the inability of property funds to meet redemptions after the Brexit rush for the exit is a foretaste of what lies ahead. He doesn't try to predict when this bear phase will begin.

"As always, you can point to many things that could go wrong - elections in Europe, horrors in the eurozone. These things may or may not happen. But valuations are now so high that there is no cushion when they do."

The recent rise in the long-term gilt rates, which central banks cannot control, is the harbinger of inflation and, eventually, higher interest rates - a negative for risk assets.

The next bear market, he says, will be different in nature from others - largely because of the lack of liquidity in markets as a result of the withdrawal of capital from the system by market makers.

It is likely we will avoid recession both here and in the US, and the price of that will be inflationSpiller believes the asset classes that will face brutal exposure when the tipping point is reached are smaller companies funds and corporate bonds.

"Investors should have cash, ready to pounce. It is always good to buy when others are forced to sell."

The standstill on short-term interest rates is bad news for savers, "but will bring some flexibility to the economy".

Spiller adds: "It is likely we will avoid recession both here and in the US, and the price of that will be inflation." That's a development that central banks will applaud as their quantitative easing adventure ends.

Fiscal expansion will mean significant infrastructure spending both here and the US, and this is expenditure that improves productivity, he says.

"Like everyone else I have no idea how Trump will behave. He could become just another boring Republican president. But the implications of his projections are inflationary, and in that sense he will expand the budget deficit."

Sterling looks 'terrific value'

Spiller does not hold strong views on the outlook for sterling/dollar rates, but observes: "Sterling has fallen a long way and is beginning to look terrific value against the euro.

"The pound has been at elevated levels for a long time because of the success of the City of London." This has probably peaked, he believes.

He is more optimistic about the UK economy growing than the consensus, he says. "The broad money supply is growing at 7% but it is only recently that this has responded to the printing of money.

"This is a good indicator of where the economy is going, so we'll have real growth as well as inflation. Everything depends on wages. They've been growing at 2 to 2.5%, from a low point. Wages might respond to higher inflation as unemployment is low."

The world economy is burdened by unprecedented levels of debt, and Spiller is less optimistic about world trade as a primer for growth, with Trump pledging to scrap existing and proposed trade deals.

Europe in particular holds little cause for cheer: "High levels of debt and deflation are poisonous. Growth in Europe won't be anything but unsatisfactory," he warns.

Peter Spiller is principal of CG Asset Management and manager of Capital Gearing Trust.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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