10 fund managers reveal their biggest fears for this market

Even professional investors have concerns about stockmarket performance. Holly Black reports on the biggest worries disturbing expert fund managers' sleep. 

There is a lot for investors to be nervous about at the moment, whether it's Donald Trump's inflammatory tweets or the prospect of interest rates rising further. Even professional investors aren't spared occasional sleepless nights spent worrying about Brexit or the end of quantitative easing (QE), so we asked 10 fund managers to tell us about the investment anxieties keeping them awake at night.

China

Marcus Brookes, head of multi-manager at Schroders

China has been a cause of concern for investors for some time, and recent data shows that the country's economic growth is starting to become patchy again and that its currency has started to weaken. An unexpected slowdown in the summer of 2015 sent global stockmarkets plunging: 24 August 2015 was dubbed Black Monday as £74 billion was wiped off the value of the FTSE 100 index alone, while the Chinese stockmarket suffered its biggest fall since 2007, plunging by 8.5%.

Brookes explains:

"Back then, the Chinese government had decided to devalue China's currency to try to boost growth by making exports cheaper."

While he is confident we won't see a repeat of those sharp falls, if nervous investors get spooked by poor economic data, volatility in global financial markets could shoot up.

Trade wars

Rosanna Burcheri, co-manager of the Artemis Global Select fund and Mid Wynd International Trust

Burcheri, a former international economics student, believes the current tit-for-tat on trade is 'disappointing at best' and could have serious consequences.

She says:

"The political pressure created by manufacturing workers suffering from [overseas] competition is an easy but misinformed excuse for a president or political party to start a tariff war." 

In July, president Trump imposed tariffs on $34 billion (£26 billion) of Chinese products, prompting retaliatory tariffs from China on a similar magnitude of US goods.

The US has argued that it needs to protect itself against cheap Chinese imports. However, a trade war could hurt the global economic recovery by forcing the prices of materials such as steel and aluminium up, dampening demand.

Burcheri is concerned that all-out trade war could lead to a sharp rise in inflation and deter capital investment.

She says:

"In the end, tariffs will harm the workforce and consumers whom president Trump claims he wants to defend."

Investor bullishness

Bill McQuaker, multi-asset manager at Fidelity

It may seem odd to cite positive investment sentiment as a concern, but Bill McQuaker thinks investors are ignoring 'clear and widespread' emerging threats. Markets have certainly behaved unusually in recent years. Bad news that historically would have shocked the stockmarket has largely gone unnoticed and many global indices have hit record highs in recent months. The S&P 500 index has rallied by around 7% since February lows, while the FTSE 100 has gained more than 10% since its wobble at the start of the year.

McQuaker, who has been taking risk out of his investment portfolio, lists a strong dollar, rising interest rates and US policy under Trump as key risks to markets at the moment.

He says:

"These forces have not all appeared overnight, but slowing global growth makes them more potent."

Investors betting on high-growth stocks such as Facebook Inc A, Amazon.com Inc and Netflix Inc could be caught out, according to McQuaker:

"For now, the market is confident that their strong underlying businesses make them immune, but that may not last forever."

The Middle East

James Henderson, manager of Lowland Investment Company

Tensions in the Middle East have intensified this year, and Henderson is concerned that a flareup will mean higher oil prices, which is bad news for his investment portfolios. The manager has a large weighting to the industrials sector – including engineering firm Senior and shipping group Irish Continental – and higher oil prices push their costs up.

Costs in the industrials space are well-controlled at the moment, and that means profit margins are strong, but there has been speculation that the oil price could reach $150 a barrel again. That won't just hit industrial companies; it will hit everyone. Consumers will feel the pinch because inflation will rise and wages stagnate, while companies will see costs increase and profit margins squeezed.

Henderson says:

"I feel issues such as the unwinding of quantitative easing are far more manageable than this, because policy levers can be pulled and we can always lower rates again. But rising industrial costs was a very real concern in the spring that could easily flare up again."

Brexit

Mark Burgess, manager of the Threadneedle Managed Equity fund

Reams have been written about the uncertainties around Brexit and what deal, if any, the UK will end up agreeing with the EU. These ongoing uncertainties have significant implications in the meantime, though, and Mark Burgess is concerned about their impact on the UK economy.

If UK-based businesses are uncertain about the future, they are disinclined to form a strategy, make long-term decisions or invest.

Burgess says:

"Companies are yet to be given any understanding of what the trade relationship [with the EU] will be after Brexit, and that means they are putting off investment. While that continues, UK economic growth will affected."

Elsewhere, he is concerned that trade wars could derail the global economic recovery and drive inflation up, both of which would further hurt the UK economy.

He says:

"The fact that the leader of the free world believes a trade war is something that can be "won" is troubling and shows a lack of understanding of global economics."

Populism

Andrew Jackson, head of fixed income at Hermes Investment Management

The election of Donald Trump as US president, the emergence of the independence movement in Catalonia and the Italian elections are just a few recent events that exemplify the rise of populism across the world. This poses problems for investors, including policy uncertainty, tensions in national and international affairs and an increasing likelihood of trade wars.

Jackson says:

"This issue could lead to far greater long-term damage to global financial markets than Brexit, relations with Russia or Trumpism."

He adds that the severity of populist-inspired events and their consequences is likely to rise and hurt financial markets.

He is also concerned about the creation of new investment products that could fail when times get tough.

He observes:

"Markets tend to be creative, and new products are often created during periods of stability and growth, when it is easy for them to achieve objectives."

His fear is that investors who have been lured into new assets and promised hefty returns, high incomes and liquidity could find themselves trapped in the event of a downturn: "If the [2008] financial crisis has taught us anything, it is that we should not make assumptions based on a short run."

Dividend cover

Robin Geffen, manager of the Neptune Income fund

Just 20 stocks account for 57% of all dividends paid out by funds in the UK equity income sector, according to analysis by Neptune Investment Management. Geffen is concerned that this concentration could be a problem for equity income investors if any of these firms cut their payouts.

That is a real possibility, considering that their average dividend cover – the number of times a firm can afford to pay its dividend from current earnings – is just 1.04 times. Professional investors prefer a ratio of at least two times, which indicates that a firm can afford its payout twice over.

This situation could worsen if the UK economy slows or company earnings fail to increase, as firms might then need to dip into their reserves to cover shareholder payouts.

Geffen says:

"Many of these 20 stocks offer the illusion of a high yield but carry the twin dangers of minimal cover and slowing earnings growth."

Quantitative tightening

Bryn Jones, manager of the Rathbone Ethical Bond

Quantitative easing – the pumping of money into the financial system by central banks – has been branded the biggest financial experiment of all time. As stockmarkets across the globe start to recover, governments need to work out how to turn off the taps without derailing the progress that has been made.

It's a tough time for bond investors such as Jones. "Bondholders are more skittish these days, as the US Federal Reserve is aggressively hiking interest rates at a time when Europe and emerging markets are still trying to offload non-performing loans," he says.

Three years of QE by the European Central Bank has "succeeded in crushing European bond yields ever lower". However, as its buying eases, bond yields are likely to rise, increasing the cost of borrowing and putting pressure on the margins of heavily indebted companies.

Jones expects retailing to feel the pressure more than many other sectors, as the sector is already struggling with huge structural changes. He is less concerned about UK banks and insurers, which are well-capitalised, so he is increasing his exposure to these areas.

A US recession

Richard Buxton, manager of the Old Mutual UK Alpha Fund

As the US Federal Reserve continues to raise interest rates in the US, the bond yield curve has been flattening. Buxton says this is usually a signal that the bond market thinks the Fed is over-tightening and that this will likely trigger an economic slowdown, or even recession late next year or in the early part of 2020.

He says:

"The increasing narrowness of stockmarket leadership is worryingly reminiscent of the late stages of a bull market."

The effects, he explains, can already be seen in the sharp falls in stockmarkets and currencies in emerging markets. This could have a ripple effect on parts of developed markets – European banks with significant exposure to Turkey, for example. If that leads to debt write-offs, investors may start to worry about European banks' capital levels again.

He adds:

"That aside, the only things keeping me up at night are my two cats."

Short-termism

Ben Peters, manager of the Evenlode Global Income fund

Peters prefers to concentrate on company fundamentals when he's managing his portfolio, rather than 'worrying about macro risks we can't control'. But despite his bottom-up strategy, his investments are of course still affected when there is uncertainty in the market.

He says:

"Unfortunately, from a macro perspective, there is always something keeping investors awake at night. Currently, it is uncertainty around Brexit, but the reality is that some political or economic headwind always has the potential to dampen the investment outlook." 

When investors are nervous and the stockmarket becomes more volatile, share prices may fall regardless of company fundamentals. That can hurt performance in the short term, but investors who keep their eyes on the long term can find buying opportunities.

On the bright side: reasons to be cheerful

Value opportunities Growth companies and bond proxies have been the most fashionable stocks to invest in over the past decade, leaving investors with a value style lagging. However, that could be about to change, according to Marcus Brookes. He thinks there are opportunities in the industrial, commodities and financial sectors that investors have been shunning.

He says:

"Much like on other occasions when growth stocks became excessively expensive - such as 1987, 2000 and 2007 – value appears poised for attractive multi-year returns."

Technological change Mark Burgess says:

"We are living through a time of unprecedented technological change and innovation, with technology rapidly changing the way we live and work."

 He believes this is very positive for productivity. He says:

"It has the potential to enrich our working lives, reducing the need for manual and repetitive jobs."

The UK stockmarket The UK has been out of favour with investors for the past couple of years, largely due to Brexit uncertainty, so plenty of companies are trading at bargain prices, according to James Henderson.

He has increased the gearing on Lowland Investment Company to 15% to take advantage of the opportunities on offer.

He says:

"We’ve been buying shares where I think people are worrying but the businesses themselves are solid – pub group Greene King and utilities firm Severn Trent, for example."

Interest rate rises Rate hikes may be bad news for homeowners paying mortgages, as their repayments will rise, but they are good for savers with cash in the bank. Savers have suffered rock-bottom returns on their money for almost a decade, but rate rises should boost returns.

Why currency exchange rates are important

Foreign exchange rates aren't just something it's important to factor into holiday plans: they can have a significant effect on your investment returns.

The pound has for the most part been weak against the dollar and euro since the Brexit vote. Investors might be surprised, then, that during that time the UK stockmarket has posted a string of record highs. Some threequarters of the earnings of FTSE 100 companies come from overseas, so if earnings are brought back to the UK and converted when sterling is weak, it boosts their profits. A weaker pound is actually good for your investment portfolio.

Unfortunately, currency movements can be incredibly volatile and difficult to predict, so it's hard to forecast when a portfolio will be positively or negatively affected by the pound's performance against other currencies.

Some funds offer a hedge for investors concerned about currency exchange rate fluctuations, but Tom Stevenson, investment director at Fidelity, advises against using them.

He says:

"Picking a hedged fund class is making a bet against a currency, and such bets are all too easy to get wrong. Ultimately, it's best to just focus on investing in the right funds in the strongest-growing regions and trust that in the long term [currency movements] will all come out in the wash."

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.