Blame de-stocking for equity market sell-off says MFS' Morley

For MFS’ Roger Morley, the current chaos in global equity markets comes as no surprise. For him, the causes were set in motion back in 2009.

In the aftermath of credit crisis many companies were forced to cut costs aggressively. One of the methods used to do this was running down inventories as the Citywire AAA rated and Euro Stars manager explains:

‘In 2009 underlying sales fell considerably and a large chunk of that was due to de-stocking. There are two reasons for this, firstly companies needed to raise cash, and secondly they were uncertain about end customer demand.’

The co-manager of the MFS' $30 billion global equity strategy, said that the knock on effect of this could be seen right the way through the supply chain as companies reacted by cutting costs through implementing short term pay freezes and refraining from filling empty positions.

‘Twelve months later you have you have a natural increase in sales, that’s what we saw in 2010, that’s what triggered the rebound.’

However, he says this positive stock market performance masked the real fragility of many global companies.

‘Commodity  prices also collapsed in second  half of 2008. Oil, copper, iron all went down so by late ’09, early 2010, input costs were lower, this enabled companies to produce good results while end demand was still weak. So it was the confluence of all these factors which helped buoy equity markets.'

‘But that has now gone away, volume growth is sluggish because the de-stocking is complete.’

‘A year on we still have weak demand but raw material prices have gone up again, temporary pay freezes have come to an end and companies have had to add costs back in. Wage pressure has crept back, cost pressures are starting to build again, it’s the way the inventory cycle works.’

‘I don’t think things have gone off the rails but I think we’re in one of those sluggish patches.’

As a bottom up stock picker, Morley’s sharp company focus comes as little surprise. He reveals that that he and his team have been using this week's sell-off to increase holdings in high quality companies with good balance sheets.

‘The market seems to have sold off broadly but we’re not bottom fishing rubbish, or buying deep cyclicals but are instead looking for good business with strong market positioning.’

In the global equity sector covered by Citywire's analysis, Morley has returned 12.3% over one year to the end of June while the average manager posted 7.9%.