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Alastair Mundy: 5 reasons to be bearish

Contrarian investor Alastair Mundy lays out the bear case for stock markets and reveals what is keeping him awake at night.

Contrarian investor Alastair Mundy has set out five concerns about the state of global markets that are nudging him towards caution in his portfolios.

‘I would love to be able to say you can avoid the top-down and the macro – and most of the time you can – but there are times when you can’t,’ Mundy warned.

So what are his macro fears?

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First, that valuations are high. ‘The median stock in the market is more expensive than it has been in the past 40 years,’ he said. Mundy uses the median to avoid overweighting large caps, where multiples are lower.

He recognises that higher valuations could be justified by record profits, but against this he suggested that mean reversion would now begin to take effect.

‘Some people will argue that companies are getting better and profitability could go through the sky. But capitalism works: if a group of companies is making excessive returns, another group of companies will come in.’

He also doubted that corporations could continue to benefit from such historically low tax rates without provoking a popular backlash.

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Second, Mundy contends that the absence of ‘outrageously cheap’ stocks now made active management much trickier. ‘The last 15 years have been fantastic for stock pickers. The last couple of years have been difficult.’ He pointed in particular to valuation dispersions being at half their average level since 1990.

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Third, he expressed reservations about the ‘worryingly high’ level of demand for equities from the public – most recently evident ahead of the TSB flotation, which he felt was only viable because people trusted the bank’s brand. ‘If they had called it anything else, they probably would not have been able to do the IPO.’

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Fourth, Mundy rejected the chorus proclaiming small and mid caps are under-analysed and can deliver perpetual growth, even those he wryly described as ‘uncovered gems’, such as Howdens.

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Last, in Mundy’s opinion we are ‘mathematically due’ a recession – one that central banks will lack the ammunition to fight given already depressed interest rates and limited scope for government stimulus.

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As a result of these issues, Mundy now runs cash positions above 10% in both his £1.2 billion Investec UK Special Situations and £906 million Temple Bar funds. ‘I would much rather own cash and the optionality to buy cheap stocks than own expensive stocks,’ he said.

He is also happy to hold bonds in this environment. ‘US equities could fall 50%, but I don’t think bonds will fall 50%,’ he said. ‘And this could all turn out like Japan and bonds will look great value.’

Mundy’s UK Special Situations fund has returned 38.4% over the past three years, and Temple Bar 49.3% on a net asset value basis, while the FTSE All Share index has generated 33% through the same period.

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