Readied for recovery after coming correction

Anyone who breeds, owns and races thoroughbreds might reasonably be marked down as one of life's optimists.

Not so fast: Peter Spiller, one of the most successful fund managers most people have never heard of, might be a man of cheerful demeanour, but few in the business are as pessimistic, or fearful, of what lies ahead for world economies and global financial markets.

Today, he is as concerned as he was ahead of the great global financial crisis - which he saw coming from a long way back. Spiller is the key figure behind CG Asset Management and its various index-linked and multi-asset funds, notably Capital Gearing.

Until central banks embarked on various quantitative easing initiatives this investment trust had a peerless, three-decade record of capital appreciation, but Spiller rigidly believes the priority now continues to be capital preservation.

China

Spiller, who regards prices of all asset classes as excessively high compared with historic and long-term values, sees dangers almost everywhere and especially in China.

As a percentage of world GDP, he says, credit levels in China have reached the same point as in the developed world in the run up to 2008. The huge expansion of credit in China is now in end-game, he says.

"Nobody can believe any of the official statistics coming out China... but there is clearly a major slowdown going on. It is fair to say no country has ever expanded credit as rapidly as China," he says.

Right now, claimed GDP growth is severely at odds with figures for electrical consumption and rail traffic figures regarded by some savvy economists as the best guide to China's heartbeat.

"The world is now a pretty cold place for growth. The US and UK economies are the only ones showing good growth, although US growth figures for the third quarter were probably overestimated, and a lot depends on how these economies can grow when the rest of the world isn't [growing]."

He adds: "Equity markets are now priced for perfection. If interest rates normalise over the next 10 years, the returns, after inflation, will be negligible."

He foresees a substantial sell-off in equity markets, one that could prove ugly. Right now, the debt instruments in CG's multi-asset portfolios are short-dated gilts and bonds. "With luck, there will be a substantial setback [in equity prices] and we will participate in the recovery," he says.

Costs of short-termism 

Spiller says corporate profits have held up "incredibly well", partly due to low interest rates and low wage costs. "But the age of share options for executives has changed the way many companies behave. For most chief executives their [personal goal for remuneration] is three-and-a-half years, so they don't care what happens in the long term. They're off."

Rather than committing businesses to longer-term plans, "it is clear that they are concentrating on the short term and maximising profits". The consequences of this will emerge when profit margins come under pressure, or when interest rates rise, he adds.

Spiller has not changed his stubborn view that inflation will finally bring down the curtain on this remarkable era in world history. The immediate danger, he accepts, is deflation, especially in Europe. "The key in these countries is wages. If they don't rise, and economies do fall over, we'll get more money-printing," he predicts.

For the UK, his post-election prediction is austerity. "We didn't have any in 2014, but there has to be plenty in the next year." He expects sterling to weaken, whether the country is led by Ed Miliband or David Cameron. The latter's commitment to a referendum on EU membership will be a negative influence.

As for the eurozone, Spiller says: "It's a better-than-even-money bet that it won't exist in 10 years, at least not with the same membership." 

CG's three absolute-return oriented funds, Capital Gearing, Capital Gearing Portfolio and Capital Value, use investment trusts for exposure to equities (30% of assets).

He is a longstanding critic of trusts that do not take measures to control share price discounts to net asset value (NAV), and has had much success with discreet lobbying of those he has bought into.

Today, some highly regarded growth and income investment trusts are issuing shares at a premium to NAV and this could eventually present a different problem.

"Investment companies that are issuing shares at a premium have made no commitment to buy them back when there is a bear market," he says. "Discounts can widen as well as narrow. If they do widen again in a bear market, there will be disillusionment for a generation."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.