Are fund managers spooked as Halloween approaches?

Halloween is just around the corner – so how scared are fund managers right now? Are they sleeping soundly in their beds or lying awake all night worrying about the unknown?

Investment markets can be frightening places at the best of times with economic and political problems causing anxiety for even seasoned fund managers. So, what are their main concerns? Are they worried they have made the wrong calls? Do they believe the outlook is clear? Are they optimistic about future prospects?

Here we take a look at the potential problems faced by managers focused on different parts of the world and the impact they may have on portfolios.

Fear of the unknown

What’s likely to happen over the coming months? This is the question being posed by all investors and the problem is that it’s not easy to answer.

It’s an issue highlighted by Charles Luke, manager of the Murray Income Trust. “Recent data points provide a less than clear picture around current conditions and future direction,” he wrote.

In a recent update, he pointed out shares had fallen in the late summer on investors’ concerns about economic data and the prospects of central banks raising interest rates: “However, in most developed economies growth appears to be more robust than might be expected in light of the meaningful monetary policy tightening over the past 12 months.”

Looking ahead, Charles believes the current tightening cycle will restrict economic growth, with the accompanying downturn resulting in declining inflationary pressures and interest rate cuts.

“The portfolio is jam-packed with high quality, predominantly global businesses capable of delivering appealing long term earnings and dividend growth at a modest aggregate valuation,” Charles added.

Challenges of China

Investing in China has become a lot harder, with “genuine and complex” geopolitical risks, according to Lawrence Burns, deputy manager of the Scottish Mortgage Investment Trust.

In a recent update, he predicted that Sino-US relations would be characterised by chronic tensions but warned there were good reasons why these should be kept in check. “For the US and China, the cost of not doing so is not mutually assured destruction but rather mutually assured stagflation – slow growth, high unemployment, rising prices – should there be a true decoupling and fracturing of global supply chains,” he wrote.

Lawrence also highlighted how China’s regulatory environment presents its own challenges and admitted the Trust hadn’t navigated them as well as it would have liked. “The pandemic limited access, and we relied on too narrow a set of corporate leaders for insight,” he acknowledged.

While Lawrence believes the future will always be uncertain, he’s convinced that any attempt to understand the world without trying to understand China was doomed to failure. “There is still much we need to observe and learn from the world’s second-largest economy and its ambitious and innovative companies,” he added.

Bad European equity sentiment

According to Alexander Darwall, manager of the European Opportunities Trust, European equity sentiment is very bad right now. “Europe-focused funds have seen $53bn of outflows from active equity funds so far this year,” he wrote in a recent newsletter.

He highlighted “clear evidence” that spending on luxury products was stalling in many countries, which had caused a reversal in the extraordinary performance of stocks in this area.

While VVICs (Very Very Important Customers) spent more than €250,000 each year on luxury goods, this group is only around 0.03% of customer numbers and accounts for 10% of luxury spending. Alexander also pointed out that green energy wasn’t faring well and noted how the travails of the offshore wind companies were well known.

“The threat of new government taxes is intensifying,” he wrote. “For instance, in France, the government proposes to tax businesses and activities to accelerate the green transition. Toll roads and airports are the first in line for this proposed tax.”

Downturn fuelled by under-investment

As recession was anticipated 12 months ago, this has changed the overall backdrop, according to Rob Burnett, manager of the WS Lightman European fund. Manufacturers have already run down inventory, oil production has been cut, and investment across the economy curtailed, he noted in a recent fund update.

“Recessions occur due to imbalances, with over-investment prior to a turning point amplifying downturns,” he wrote. “In this case, underinvestment is more of a problem, rendering this a different economic cycle to those in recent experience.”

While Rob believes a manufacturing recovery is possible in the coming quarters as companies are forced to re-stock, he warned this resilience can create problems for asset prices.

“The rally year-to-date has been built on the anticipation of lower interest rates, lower energy prices and plentiful liquidity,” Rob continued, “but these changes are already priced in, and so each day where interest rates and oil do not decline amounts to a tightening of financial conditions that can impact asset prices.”

Caution in many property markets

There is a mixed picture when it comes to international property stocks, according to Jon Cheigh, manager of the Cohen & Steers Global Real Estate Securities fund.

“Slowing economic growth and high (albeit moderating) inflation temper the near-term outlook for real estate, particularly for sectors lacking pricing power,” he warned in an update. However, he also pointed out that cash flows remained generally sound, while healthy earnings growth was anticipated into 2024.

Jon is positive on US REITs, particularly those with good pricing power, and believes data centres should continue benefitting from demand for cloud computing and artificial intelligence. He also predicted that certain landlords with high-quality properties and strong balance sheets stand to gain market share over time, despite the secular headwinds facing retail.

“However, we are mindful of the impacts that elevated inflation and a potential slowdown in the jobs market could have on the US consumer,” he added. “We remain cautious toward offices as businesses reassess their future needs, although we have an allocation within the Sunbelt, which we favour over coastal locations.”