Fund managers are more bearish than bullish: a sign of more pain to come?

We detail how three respected fund managers are adopting a cautious stance following the sharp market falls.

Since becoming a financial journalist a decade ago, this is the first full-blown market crash I have witnessed; but in a period that’s been described by various commentators “as the most unloved longest bull market in history” I’ve been witness to plenty of bumps along the road.

There were notable stock market tumbles during the European sovereign debt crisis, the “taper tantrum” of 2013 as the Federal Reserve eased off its bond-buying programme, and of course Brexit, among other market falls. However, the steep falls endured by markets since 21 February have been complete carnage. Since the start of 2020, the FTSE 100 index has lost around 30%.

Even drastic moves by the US and UK, with the Federal Reserve cutting interest rates to zero and the UK government’s £330 billion loan guarantee to support businesses, have not been greeted positively by investors, and instead markets have continued their downward trend.

At the end of last week, in response to the Bank of England cutting interest rates to 0.1%, UK markets (including the FTSE 100) climbed upwards. But this, rather than being seen as markets recovering from bottoming, was viewed as a “relief rally”. And so it proved in early trading this morning (8.30am), the FTSE 100 is down 4.4%, which puts the index below 5,000 points.

This sell-off seems different from others in another respect. Usually when markets fall out of bed, fund managers are quick on the offensive in describing such declines as a “buying opportunity,” and talk up their own book by spelling out why the way they invest now looks even more compelling than it did before the sell-off.

This time, though, managers have been keeping a lower profile. Perhaps this stems from the seriousness of the situation; given thousands of lives have been lost, fund managers will not want to appear callous by describing such falls as a chance to load up on shares that can now be purchased at much cheaper price tags.

But it could also be a reflection that with this sell-off, there could be more pain to come. As Paul Niven, fund manager of F&C Investment Trust, acknowledges:“We cannot tell when the current crisis will end.”

He adds: “Investors are questioning whether policy action will be effective in shoring up economies, as it has been historically. They are also closely monitoring the spread of Covid-19 and, here, there is some hope that a moderation in the pace of new cases in China and some European countries may indicate that containment measures are effective.

“Nonetheless, while the downturn will be painful, markets have moved a long way to discount the bad news which is yet to come on the economy and on corporate profits.”

Niven adds “there is little doubt” the global economy faces a serious contraction. He adds this will place tremendous strain on both consumers and on corporates.

He also notes: “There is a significant risk that the recovery, when it comes, will be impaired by the severity of the downturn. While the near term will remain challenging, we remain focused on long-term opportunities for our investors.”

Simon Gergel, manager of Merchants Trust, agrees the “overall market direction is hard to call”.

He notes: “There could be a very sharp recovery at some point – markets tend to move well before fundamentals improve. We have seen the first signs of a recovery in China after the Covid-19 lockdown period, and other epidemic situations have historically not lasted that long.

“But we are not complacent either; this could go on for many months and have lasting consequences. So we are trying to add value from stock selection, not from calling when this pandemic gets under control and when markets will recover.”

On that front Gergel says changes to the portfolio over the last three weeks have not been dramatic, but a couple of tweaks have been made. 

He says: “We have looked for companies which were not fully reflecting the changed circumstances in their valuations. For example, we sold out of one holding which had both a high exposure to China and Hong Kong, where there are a number of issues (not purely Covid-19) and also an exposure to falling US interest rates and a possible credit shock.

“Conversely, we have added to some other more defensive businesses, which had not moved up too sharply in relative valuations. But we have not simply added defensive positions and sold cyclicals. We have also added to more cyclical companies where we are confident in the long-term value, and share prices are particularly attractive.”

Similarly, Peter Spiller, manager of the Capital Gearing investment trust, which has a focus on wealth preservation and a very low allocation to equities (17% at the end of February), is continuing to adopt a cautious stance. This is also evidenced by the fact that half of Capital Gearing’s portfolio is in government bonds, 29% index-linked and 20% conventional bonds.

According to Spiller, despite the sharp falls, the fact remains that US shares are still looking pricey relative to their history, so there could be further pain to come for global markets.

In an interview with Money Observer earlier this month (9 March), the day the FTSE 100 declined over 8% on the market open and slipped below 6,000 points, Spiller said: “A big constraint on buying is that the S&P 500 is expensive. If Wall Street goes down, then so will global markets. I do not think now is the time to increase exposure to equities, value is still not compelling. 

“I think we are now likely to have a global credit crunch. And during a downturn the US is in a better position than Europe to deal with it, as US banks are in much better shape.”