In the latest instalment of the Best Advice: Closed-end Funds Forum series, several investment trust specialists evaluated the current market situation, the sustainability of trends seen in the first half of the year, and opportunities and risks that lie ahead in the second half of 2013.
The first five months of this year saw a rise in equity markets in spite of a lack of any real improvement in the wider economic environment. Gains have been focused in certain sectors and regions but, on average, the global equity market returned some 15% to end of May.
The panel of speakers debating such developments and the outlook comprised Phil Doel from F&C Investments, Peter Walls from Unicorn Asset Management and Bruce Stout from Aberdeen Asset Management.
We started the debate comparing current markets with the situation in 2007, prior to the financial crisis. Indeed, valuations are now not dissimilar to those that prevailed at the previous peak, in the summer of 2007.
Recent comments from Troy asset manager Sebastian Lyon, in which he stated that he believes we may not be at a new peak just yet but are getting closer, fuelled our panel debate. The panel was more pessimistic about the current situation. Bruce Stout said that if you wanted to protect capital in 2007 you could at least move from equities to bonds, with 10-year US Treasuries paying some 5.5% and UK gilts paying 5%. Since then, however, the balance sheets of both countries have deteriorated and current sovereign bonds look very expensive. Likewise, quality equities do not provide a safe haven anymore as they have been re-rated over the last two years and now trade at high multiples, offering a shrinking margin of safety. The panel also agreed that a lot of the earnings growth that we’ve seen in recent years has been provided via share buybacks rather than organic growth.
The panel then broached the subject of quantitative easing and the potential impact when it comes to an end. Stock markets tumbled on the Fed’s recent announcement that it might end, or “taper”, its bond-buying programme sooner than expected. Bond funds worldwide suffered their biggest weekly outflows on record following the statement, accounting for some $12.5 billion (£8 billion) during the week ending June 5, 2013, according to FundWeb. Nevertheless, the panel agreed that QE cannot continue in perpetuity and said the Fed’s indication about its plans is a sensible way to prepare the market for what is about to happen.
In terms of opportunities going forward, Peter Walls mentioned his penchant to private equity and that commercial property in the UK currently looks attractive. We also asked our audience about their views on the markets, resulting in 45% saying they expect the US to be the strongest stock market in the second half of the year, while 67% expect Europe to be the weakest.
These are just a few highlights from the session, covering valuations, market drivers and risks, and much more. You can listen to the full recording by clicking play below (or open in a new, larger window by clicking here).
