Investec’s Alastair Mundy has hit out at central banks ‘incompetence’ for pumping markets full of liquidity despite having no readily obvious exit strategy.
In his 2014 outlook, the veteran investor singled out policymakers as the biggest risk for the year ahead.
Mundy, who runs eight funds across a host of asset classes, said global investors had become solely focused on the issue of tapering and the withdrawal of QE in general, which is a mistake in itself.
‘In a desperate desire to avoid deflation central banks might well inject so much into the system that avoiding longer term inflation will be very hard,’ he said.
‘Yet central banks appear to have extraordinary confidence (or at least they pretend to) in their ability to control inflation and controlling the exit strategy from quantitative easing. There’s no proof whatsoever that they’ve got those abilities.’
Mundy previously blasted ‘cheerleaders’ for talking up US equities despite stocks being expensive and valuations being close to full.
This led Mundy to up his holdings in gold and inflation-linked bonds, while also increasing his cash weighting.
‘My worry is that central banks will discover fine tuning their policies more difficult than they believe. I am therefore happy to hold gold as an insurance policy in case investors develop fears around central bank competence.’
Returning to the theme of tapering, Mundy said this fixation had left many investors vulnerable to onset of problems outside of the United States.
‘The markets are myopic and focused on tapering which means that it is not really prepared for any other shocks which could come from Chinese economic growth disappointment, a crisis in the eurozone, social unrest in emerging markets or trade wars caused by currency devaluations.’
This combination of factors has seen Mundy reiterate his cautious approach to the markets.
‘We are very defensively positioned with significant allocations to cash, gold and inflation-linked bonds. We worry asset classes will be highly correlated in a future market sell-off and are looking to dampen some of this effect.’
His cautious approach has seen the flagship Investec Cautious Managed fund lag its benchmark over three years, returning 21.63% versus a 25.92% rise in the LCI/FTSE 350 High Yield/Brit-Gove 5-15Y composite index.