Eden Financial’s Mark Harris is watching for a pre-US election dip and believes the Chinese equity market has potential to surprise on the upside.
How has your asset allocation changed over the past three months?
We started the new year bullish and have been suitably rewarded. Over the past month, we have started to raise cash in the CF Eden Global Multi Strategy fund on worries that markets had got ahead of themselves, with sentiment extremely positive. The fund’s equity weighting is now at 35%, with 24% in alternatives, 26% in fixed interest and the balance in cash.
What have been your latest allocation calls?
Reducing risk has been our most recent theme. In the short term, if there is a setback in risk assets there is likely to be a rally in fixed income markets. However, we would look to sell on this, reducing investment grade exposure and potentially shorting gilts.
Where are you seeing opportunities from a valuation perspective?
I am optimistic about equity markets, but with some reservations. I want to buy. As the run has drawn on, though, prices have become slightly stretched. If the market corrects by 5% to 8%, I would see this as a buying opportunity.
One trigger could be a pre-US election dip in markets between now and the summer. Buying on the dips is sound advice, in particular increasing exposure to the US and emerging markets.
The fact that central banks are squarely behind risk assets across the globe for the foreseeable future supports this case.
In the UK, some retail names and mid-cap oils on a stock-specific basis look attractive. These have a stronger correlation to the oil price than the more diversified oil mega-caps, such as BP and Shell.
Mid and small caps in general look like they could accelerate from their sluggish performance of last year, as do emerging markets. Conditions resemble the market bounce in 2003 in some respects, and we could see a repeat of the positive performance of these areas. Valuations are generally supportive in emerging markets, especially Brazil.
Companies are sitting on cash piles. They have two basic options: buy or build. The former looks more likely, as it is quicker to buy a competitor and reap the rewards than build from scratch.
In the US, technology and healthcare remain attractive, with the former in the throes of a significant capex cycle and the latter looking promising for those companies able to deliver while controlling costs.
Where could a potential surprise on the upside come from?
If investors gain confidence the Chinese authorities can take a more proactive stance in engineering a soft landing, without further troubling outfall from the property market, then Chinese equities could provide a major surprise to the upside. Sentiment is negative, valuations are cheap and earnings are picking up. These are all the ingredients for a major surprise in equity return.
What is your current gilt exposure and how do you expect this to change over the coming year?
Quantitative easing has created what is in effect a government bond bubble. This is probably the market to avoid, and the very recent sell-offs in gilts, bunds and US Treasuries may indicate a reversal from last year’s relative outperformance. I favour zero exposure, and would short gilts and US Treasuries on any strength.
What technical indicator are you currently watching most closely?
This is an easy one – sentiment and positioning. We’re keeping a weather eye on sentiment indicators, including put-call ratios together with speculators’ positioning in the futures markets, across equities, bonds, commodities and FX markets.
What do you view as the potential black swans for 2012?
A true black swan is, by definition, unpredictable – perhaps a Monica Lewinsky-style scandal in a US Presidential candidate’s personal life?
There are geo-political risks from Iran, which could lead to an extreme oil price spike. This in turn leading the world economy into a recession and all risk assets suffering large falls. The US recovery could gain real traction and surprise on the upside, with employment and house price gains rapidly pushing up consumer confidence and consumption. This creates a marked increase in inflationary expectations leading the Fed to renege on its commitment to keep interest rates low until 2014.
Mark Harris joined Eden in September 2011 as multi-strategy fund manager, helping develop Eden’s client-focused, multi-asset product range. He now co-manages the CF Eden Global Multi-Strategy fund. Harris was head of fund of Funds at New Star Asset Management and subsequently at Henderson Global Investors. He personally managed eight award-winning funds, totalling £800 million (of the £2 billion managed by his overall team), encompassing a range of low- to high-risk mandates.