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Bulls versus bears: will fortune favour the brave?

Bulls versus bears: will fortune favour the brave?

Following one of the most impressive years for the FTSE 100, managers are split over whether the market is teetering on the brink of a sharp correction, or can sustain its momentum.

Softer data in the first six weeks of 2014 and a number of corporate earnings disappointments have led to an uptick in market volatility that has widened the gulf between the bulls and the bears.

Fearful of losses, bearish managers have started to stockpile cash in an environment they say looks unjustifiably expensive.

Meanwhile, the bulls are building up exposure to riskier areas of the market such as Europe and Japan, mindful that taking a defensive stance last year caused some funds to painfully lag the rally. 

John Husselbee (pictured), head of multi-asset at Liontrust Asset Management, said it was the uniformly positive lead up to 2014 that has made him cautious of a correction.

‘We saw so many fund managers walk through our doors in November and December that were bullish that it made us fairly nervous. I always think when you see a consensus like that, you look for the contrarian view,’ he said.

Cash build-up

His portfolios are currently at the upper end of their historical cash weightings, at the expense of bond exposure.

‘We think markets have gone too far, too quickly, and lots of the optimism in the future has been priced in,’ he argued.

And Husselbee is not the only manager braced for a potential correction.

Marcus Brookes, head of multi-manager at Schroders, has built up the cash in his flagship £1.3 billion Multi-Manager Diversity fund to almost its highest ever weighting, as he warned the bull market could end ‘when people aren’t expecting it’.

Last month, Diversity had a cash weighting of around 30.6%, up from 25.5% at the end of last year.

‘If I get caught underperforming in a market that looks expensive, I will feel I have let my investors down,’ Brookes told Wealth Manager in a recent interview.

Risk-on environment

He argues that despite a recent softening, much of the economic data available remains positive, which has led to misplaced risk appetite.

‘One of the problems investors have is that data is supportive of a risk-on environment. It’s supportive for high yield, emerging market currency and debt, but at the moment those assets are not going to perform well,’ Brookes said.

At the other end of the spectrum there are managers that are still looking to capitalise on stronger economic growth in the more unloved areas of the market.

James de Bunsen, who sits on Henderson Global Investors’ multi-manager team, said the improving macro situation has made him quietly optimistic.

‘We are cautiously constructive because valuations have gone up and there is a bit of complacency around,’ he said.

The Henderson multi-manager team has recently shifted its portfolios to a slight European overweight at the expense of the US.

‘Earnings momentum is better in Europe. We do not think the macro issues have gone away but there is a decent story at the moment,’ de Bunsen said.

He is also overweight Japan, which he thinks ‘has further to go’ as its quantitative easing programme continues.

Another manager who is seeing further upside is F&C co-head of multi-manager Rob Burdett. In the last few weeks he has moved his F&C MM Navigator Boutiques fund from an underweight in Asia to a 2% overweight in the region.

‘At a corporate level, it still looks very good, and cheap,’ Burdett said. ‘We were underweight Asia all of last year and that is a fairly recent move for us based on valuations.’

Markets will muddle through

Burdett said he expects the market to ‘muddle through this year,’ on the belief that ‘the more risk you get, the more return you get’. In the long term this is leading him to favour equities and absolute return bond funds.

However, within his Asia call Burdett is underweight emerging markets due to the uncertainty surrounding how new Federal Reserve chair Janet Yellen will go about reducing the flow of liquidity to markets.

Markets are notoriously difficult to predict, and it is perhaps unsurprising that a growing number managers fear the wobbles seen at the start of this year could herald a more serious correction. But the bold were the big winners last year, and with bonds and cash offering a negative real return, safe havens are hard to find.

Whether fortune will again favour the brave remains to be seen.

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