Fund managers warn a market pullback is on the cards

There is a growing consensus stock markets will soon enter a trickier period, with various fund managers more bearish than bullish.

Since the end of March, global markets have been clawing back losses made during the Covid-19 market sell-off, but as we approach the final quarter of 2020, various fund managers have warned that a market setback is likely.

As we noted last month, there is a growing consensus that markets have moved too fast, too soon. Bruce Stout, manager of the Murray International (LSE:MYI) investment trust , is one of a number of fund managers to warn that markets are about to enter a trickier period.

• Ian Cowie: investment trusts survive the dividend drought
• Record investor exodus from UK funds
• Bargain Hunter: four out-of-form trusts looking cheap

Two other respected fund managers agree that a market pullback is on the cards: Sam Morse, fund manager of Fidelity European Values (LSE: FEV) and Harry Nimmo, fund manager of Standard Life UK Smaller Companies Trust (LSE:SLS).

Morse told interactive investor's Funds Fan podcast that one of his regrets during his nine-year tenure as manager of Fidelity European Values is that the trust’s gearing level has been relatively low, averaging around 5%.

In the next market cycle, Morse plans to increase the trust’s gearing level, but is holding fire for now because he thinks that a market setback is on the cards.  

He says: “When share prices fell very heavily in March, I did add to the gearing, moving up from about a 4% level to an 8% level.

“But then I paused because I felt that stock prices had recovered much faster than I expected and [had] actually gone a bit further than I expected. We are back to all-time highs in the States ,and Europe [is] not far off that.

“Given what is going on in the economy at large, that means that the market now is quite fully valued. I am caught a little bit here between strategy and the tactics. My strategy is to take the gearing level higher for the next stock-market cycle, but tactically I think it pays to pause at this point in time.

“If we do see some pullback, as we often do in the Fall, then I may take advantage of that to push it to a higher level, perhaps if there is a resurgence of the virus leading to new lockdowns.”

Nimmo agrees the future recovery may mean markets enter a trickier period and with it an uptick in volatility.

He says: “Our view is that we have passed the worst in stock-market terms and that 19 March 2020 might have been the low point. However, with the potential for further spikes in Covid-19 outbreaks, a vaccine some way off, and a difficult negotiation on Brexit ahead, the recovery may be punctuated by setbacks.

Nimmo adds there is a possibility that there will be a “dash for trash” market rally at some point.

He says: “Were this to occur, there may be a period where we see significant outperformance for cyclical, slow-growth industries where companies are on low traditional valuations. They, however, can be traps for the unwary.”

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.