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.
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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.”
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