Have global equity markets peaked? Jupiter managers believe so, April 2018

Speaking at the company's annual investment dinner on 25 April 2018, John Chatfeild-Roberts, who heads up the team running the Jupiter Merlin range of managed funds, said that he believes global markets peaked on 26 January this year.

Rising interest rates in the US and a withdrawal of money from the financial system, coupled with high stock valuations, leads him to believe that global stock markets were due a fall and that previous records will not be broken again in the immediate future.

More volatility to come?

His colleague, Ariel Bezalel, manager of Jupiter Strategic Bond fund, which is on the Chelsea Core Selection, is equally cautious and said that he is “worried that the rise in volatility in February was a rehearsal for what we could see in the second half of this year, as interest rates go higher.”

Ariel also highlighted the fact that US dollar weakness - due to strong global growth - had recently started to recover, which he sees as a warning sign. “Cracks are also starting to emerge in some emerging markets,” he said. “ Turkey for example. It is quite unstable and has huge US dollar and euro liabilities. The weakness in the lira could filter through to Mexico and Brazil.

“European data has been underwhelming in the past couple of months across the continent and the euro has been weak,” he continued. “Germany is a huge exporter to China, so this could be a sign of weakness in China. The Swedish Krona has also come under pressure – perhaps in part due to a lacklustre order book from the Far East.”

Ariel concluded: “The oil market is getting tighter and tighter. Demand and supply are coming into balance. Oil is basically a tax on world growth and the US consumer in particular. For every $10 rise in the oil price, 0.5% comes off world GDP. In the short term it causes inflation, in the long term it is bad for growth.”

Retail therapy?

Ben Whitmore, manager of Jupiter UK Special Situations, which is on the Chelsea Selection, said that “UK retail isn't quite as bad as Russia, but it's a close call”, meaning that the structural challenges the sector faces right now have increased making it a difficult place to invest. However, for value investors willing to do some detailed research, it is starting to open up some opportunities.

Ben also pointed out that, for the first time in 10 years, two FTSE Chief Executives were not paid a bonus because their companies had not performed well. This is a good sign that shareholders are having a greater influence on good management practice.

James Clunie, manager of Jupiter Absolute Return fund, another Chelsea Selection choice, meanwhile, used the luxury goods sector as an example of when markets are peaking. “Some luxury goods companies are huge. The company that owns Gucci has a market cap of over $55bn,” he said. “Luxury goods tend to do well when something is in a bubble. To me it is a warning sign.

“Another sign I look for is when the price paid for a company in a merger or acquisition seems to be at an inflated premium. At that point I would look to short the bidder – especially when we are nine years into a bull market.”

Edward Bonham Carter, chairman of Jupiter, concluded the debate, with his own views on where we are in the market cycle. “The banks are far healthier today than they were in global financial crisis, so the next problem is unlikely to come from them. But the world is even more indebted – led by governments and China. Corporates have, by and large, been quite sensible.

“Protectionism could become a game changer, especially if rhetoric turns into practice. Inflation would pick up markedly in that scenario. But I believe the most likely outcome is that inflation stays above 3% for a while but a few interest rate increases brings it back down again reasonably quickly, and we bounce along for a while in that pattern.

“We are in transitory times and how it will pan out is anybody's guess. Now is a time to have a margin of safety in portfolios.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund managers and do not constitute financial advice.

Published on 30/04/2018