JO Hambro Capital Management star John Wood believes an iconic tune from rapper turned pop star Dizzee Rascal best sums up current market conditions.
‘It might surprise some readers to know that I don’t draw upon the work of English rapper Dizzee Rascal all that often, but his 2009 hit 'Bonkers' seems to sum up both current stock market conditions,’ Citywire + rated Wood said in an update on his Citywire Selection Johcm UK Opportunities fund.
Things certainly went ‘bonkers’ overnight in the US with the Dow surging over 17,000 for the first time in its history thanks to a forecast-busting jobs report, which revealed unemployment had fallen to a six-year low. The news helped lift the FTSE 100 to its highest level in three weeks.
In Wood’s update, which was released before yesterday’s market rally and covered the month of May, he gave a frank account with his tongue firmly in his cheek, describing his fund’s recent strong run as ‘incongruous’.
‘The fund is top-ranked within the IMA UK All Companies sector over the past three months despite being “wrongly” positioned: we had the “wrong” cash balance at 18% and the “wrong” beta at around 0.7, yet the fund has come out top over this short period in a rising market.’
Wood continued to see plenty of ‘bonkers’ behaviour elsewhere, with some indicators carrying a nasty suggestion of the pre-crisis years of 2006/07.
‘Debt is cheap and corporates (via mispriced high yield debt) and consumers (often via shadow lenders) are loading up on it.
‘We have economic growth in the UK that still appears to be founded on debt and a London-centric housing market bubble that owes much to a QE-inspired recovery in financial markets and owes very little to improved corporate fundamentals.'
He added: ‘UK consumers remain horribly over-leveraged but cling on thanks to rock-bottom interest rates. If anything, they appear to be gearing up.
‘What consumer recovery there is appears to be confined to London and the South East; with the benefit of personally not being based in the South East, my sense is that conditions outside London and the South East remain difficult and that consumers remain challenged.’
Wood sees improving cars sales as anecdotal evidence of a reinvigorated consumer, although he points out one-off PPI refunds have probably played an important role in this.
‘If we look to the United States, where I am even more pessimistic about the recovery, it is noteworthy that sub-prime car loans stand at record highs.
‘If this is a recovery, it is one only being enjoyed by the very wealthiest in the UK and US societies; the rest are resorting to debt and running down their savings just to try and keep up.’
The strong run over the last three month has helped keep the Johcm UK Opportunities fund, which Wood co-managers with Citywire A-rated Ben Leyland, ahead of the pack, with a return of 42% in the three years to the end of May. This compares to a peer group average of 33%.
The top holding at the end of the month was Reed Elsevier at 5.06%, while consumer goods accounted for the biggest sector allocation at 18.5%.