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Global equity rout: how to play battered bear markets

Citywire speaks to leading global fund managers, including Hugh Young, for their views on the havoc wrought on stock markets this year.

Global equity rout: how to play battered bear markets

Global equity markets have experienced a terrible start to the year with Europe, Asia and the emerging markets all coming under intense selling pressure.

Against the backdrop of a slumping oil price and stock plunges in China, France, the UK and Japan have all slipped into bear territory (or declines of more than 20% from the last peak).

Is it time to cut and run or stick to your guns and hunt out opportunities while other investors head for the exit? Citywire canvassed top investors to see how they are handling the hardship and what is likely to happen next.

The European view

Citywire AAA-rated David Robinson, manager of the Melchior Selected Trust European Opportunities fund, called it one of the worst sell-offs on record but downplayed comparisons to the 2008 crash. He expects Europe to show resilience in the near term.

‘European equities are 25% down from their peak in 2015 and there is pressure for them to bounce back. We have been underweight energy and mining for some time, but we are looking out for companies with good fundamentals, which are becoming cheap.’

‘In December’s market correction, the bulk of the weakness was in energy and mining. In the last month the sell-off was more broad-based across several sectors. What we are doing is adding to some quality names with good fundamentals that had a disproportionate stock decline.’

Meanwhile, boutique fund manager Francesco Filia of Fasanara Capital in London said the current downturn is a result of ‘fracturing’ caused by failed QE attempts, which have had diminishing impact over time. This, he said, makes it exceptionally difficult for long-term investors.

‘The implications for portfolio positioning are such that we view buy and hold strategies hard to implement in rodeo-type markets, as random moves are wild enough to trigger any pre-set stop along the way.’

‘In fractured market like these ones, we prefer to keep the risk light, positions small, and act opportunistically, and to do so in line with our fundamental views, preferring optional formats to delta one formats, to skew the risk-reward as much as possible.’

Developing world in doldrums

Erik Landgraff, co-manager on the €3.7 billion SKAGEN Kon-Tiki , an emerging markets fund, said now was the time to look for mispricing in the market, especially within the developing world.

‘The cheap stocks universe is quite vast and while some are cheap for a good reason and others are cheap but we don’t know why, which are best to stay away from, others are cheap because we know they are mispriced and those are the ones investors should focus on. ‘

Landgraff also said returns on equities were down considerably in the emerging world but said there was historical precedent here. ‘Let’s not forget that in 1979 people said inflation had destroyed the equity market and analysts had predicted the death of equities while in hindsight it turned out to be one of the best years to buy stocks.’

Global gripes

Speaking to Citywire Selector, Kenichi Amaki, said it was impossible to regionalise the crisis, with many investors treating the wider economic deceleration as distinct from the challenges being created by China’s growth slowdown. He said his home market of Japan has been dragged into these difficulties.

‘It's not just Japan's bear market, it is a global one. I don't like losing money, but in that sense it's unavoidable. If Japan was the only market going down I would be very nervous but that isn't the case. I really don't know how to explain how we have started this year.’

Amaki said the Japanese market has already incorporated some downside to earnings, while multiples are contracting more than they probably should.

‘It is hard to deal with volatility when it is happening. You have to go into these storms prepared. It always feeds back into what you do on a normal basis so you can deal with things when volatility hits,’ he added.

On alert in Asia

China has certainly emerged as an epicentre for these problems in the current market. This has had huge knock-on effects for Asia and the emerging markets, with Aberdeen Asset Management's veteran investor Hugh Young said he was conscious of a change in investor sentiment.

However, Young believes there may be pockets of growth despite the downturn. ‘Our contrarian instincts tell us that volatility and opportunity often go hand-in-hand. That’s why our fund managers are starting to get excited again.’

Meanwhile, Mark McFarland, global chief economist at Coutts, believes the reactions in Asian markets may be an exaggeration of the real stresses, with little lasting impact on asset prices.

‘More often than not, where we believe the economic and financial fundamentals are sound, we prefer to buy assets whose prices have fallen, rather than sell them. This is often painful at the time, but can tend to pay off in the long run,’ he said.

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Look up the funds

  • Melchior Selected Trust European Opps I1 EUR
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  • SKAGEN Kon-Tiki A NOK
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Look up the fund managers

  • Francesco Filia
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  • Erik Landgraff
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  • Kenichi Amaki
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  • Hugh Young
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  • David Robinson
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