Save & Invest Financial Planning

Investec Cautious Managed

When fund manager Alastair Mundy visited Save & Invest, his key message was that in his opinion markets are over-priced, and therefore a bearish approach is best. 

A Bearish View on Markets With Alastair Mundy

With world markets at historic highs, Alastair’s view is that currently up to 40% of fund managers are bearish, although many are not taking action to prepare for a sell off.  Therefore, he’s concerned about liquidity in the event of a sell off as there may be too many sellers and not enough buyers.  He is also concerned that during these times of historically low interest rates, debt levels have continued to grow.  Governments continue to be over burdened, while many corporations - particularly in the US - have taken advantage of low interest rates to borrow to fund share buy backs.  This has fuelled both higher debt levels and higher share prices, making these companies vulnerable to even modest interest rate rises.

Historically, high levels of sovereign debt have been the precursor to either repayment defaults or inflation, neither of which is good news for bonds.  Therefore, he is choosing to stay away from bonds and bond proxies.  Instead he is using precious metals and the Norwegian Krone as a bond alternative, which he views as his insurance policy should equity markets fall.  Historically, Alastair has favoured gold, but is increasingly moving into silver (the fund’s combined holdings are approximately 14%) as he believes there is a silver shortage coupled with ever increasing demand given its use in many industrial processes and products.

Given Alastair’s views on an overpriced US stock market, and with many companies showing signs of balance sheets under pressure, he holds a short position against the S&P 500.  He is essentially betting against the US stock market with an instrument based on a futures contract which profits as the S&P 500 falls in value.  Alastair still believes there is value to be had from so-called value stocks (those shares considered to be under-valued) and therefore, US equities are not completely disregarded.  He favours UK domestic stocks where sentiment has generally been poor for some time, even before the Brexit vote.

He also favours banks (largest individual sector holding at around 14%).  The banking sector remains largely oligopolistic as barriers to entry remain fairly high dampening the impact of any meaningful competition.  As a highly regulated sector, the scope for bad decision making by management is much reduced and they have strong balance sheets to support dividend payments.

Often viewed as a contrarian investor, his approach does not follow the norm, but long-term annualised performance of 7.5% shows it to be effective.

The Future of Interest Rates

When questioned on interest rates and inflation, his view was that most central banks would probably be comfortable with inflation at 2-4%, as this would help reduce sovereign debt levels as a percentage of GDP.  Therefore he expects most central banks to resist raising interest rates in the short to medium term in the face of higher levels of inflation.  The difficulty for central banks is that they will come under pressure to increase interest rates as inflation grows, as the demand for wage rises will be strong.  Further, controlling inflation is notoriously difficult and can quickly get out of hand. 

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