Why professional investors are more bearish than bullish

Various market commentators are adopting a glass half-full attitude. We explain why investors are concerned that markets have moved too fast, too soon.

Since late March, barring a couple of days of heavy selling that includes last week on 30 July, markets have been gradually moving upwards and clawing back losses made in the first quarter of 2020.

Given how markets have performed, it is no surprise that various fund sectors have put in a strong showing over the past four months, with figures from FE Analytics showing that from 31 March to 31 July the average global equity fund has returned 19.2%.

But, in the months ahead, the attitude among professional investors is one of caution, with various commentators recently expressing concern that markets are moving too fast, too soon. 

The warnings emerge at a time when retail investors have flooded back into the market, with figures from the Investment Association showing £11.2 billion was invested in funds in the second quarter. 

Bruce Stout, manager of the Murray International investment trust, is in the bearish camp. Speaking to interactive investor’s Funds Fan podcast in June, he said: “There’s a consensus-type view that the steeper a recession, the steeper a recovery, and this is borne out of the experiences of the global financial crisis when there was a V-shaped recovery. I think the consensus believes this will happen again and is, therefore, keen to drive stock prices higher.

“But we have no transparency on what sort of recovery is coming and it may take much longer than people think, so from that point of view markets are probably ahead of themselves relative to the fundamentals that have not really started improving.”  

Similar sentiments are echoed by other professional investors.Andrew McCaffery, global chief investment officer of asset management at Fidelity International,cautions: “The extraordinary monetary and fiscal measures taken by policymakers to counter the worst economic effects of the virus encouraged an element of animal spirits - particularly among retail investors. But as more bleak economic data emerges, we think markets are nearing their limits without further stimulus and a much stronger recovery. They cannot defy economic gravity indefinitely.”

He adds that secondary outbreaks and a failure to get the first outbreak under control in some countries are forcing more local lockdowns. As a result, the reopening of economies is likely to take time and will happen at different rates.

“Evidence of the real, underlying economic damage is emerging, especially in labour markets. For these reasons, we believe that the third quarter is likely to be much more challenging than the second quarter recovery would imply, and markets could see renewed volatility,” says McCaffery.

The handling of coronavirus across the pond will heavily influence the direction of global stock markets given the size of the US market and the dominance of its technology stocks on the overall performance of global indices over the past couple of years.

Seema Shah, chief strategist at Principal Global Investors, points out that Covid-19 infection rates have surged in the US, with daily new cases hitting 65,000 on average over the last two weeks, up from around 21,000 per day in early June. In contrast, in Europe and developed Asia, aside from some local spikes, Covid-19 infection rates remain relatively low.

Shah says: “Make no mistake, the coming months will prove testing. The US recovery is likely to face challenging times - either from floundering consumer confidence, renewed lockdowns or a reversal of government fiscal support.

“In this environment where the economic and financial risks are tightly intertwined with health risks, investors may want to shift to a more defensive stance within the US. Alternatively, other regions beckon. Much of Emerging Asia and Europe are faring better in controlling the virus, have fiscal policy still on their side, and valuations are more attractive. The tide is no longer going to lift all boats, so pick your vehicle wisely.”