Top market strategist issues market storm warning
Just when you thought market sentiment could not possibly get worse, one of the UK’s top strategists, Percival Stanion, has warned it is about to do so.
Stanion chairs Baring Asset Management’s strategic policy group. His dynamic view on asset allocation drives institutional portfolios worth £5.4bn (€6.8bn) and guides Baring’s wealth advisers.
Defensively positioned government bonds, cash, gold and commodities account for 60% of Baring’s multi-asset portfolios. Cash, near-cash and gold is 25% of overall exposures.
The 2008 World Wealth Report published by Merrill Lynch and Capgemini last week confirmed that wealthy investors raised allocations to bonds and cash from 35% to 44% last year.
Morgan Stanley’s wealth management division is cautious, with cash allocations hitting 15%, although they have fallen to 10%.
Stanion warned: “Earnings and dividend forecasts suggest that equities are cheaper than they have ever been against bonds. But Asia’s prospects have been hit by inflation, Europe is slowing down and the US consumer is being hit by falling house prices and the rising price of petrol.
I expect a fall in exports and a revision in forecasts, suggesting that pessimism will hit extreme levels in October.”
From that point on, Stanion will aim to buy equities when capitulation takes place, notably in housebuilding and banks.
His caveat is that stocks will bounce if oil prices are hit by a recession-induced slump: “There’s no shortage of the stuff although supply bottlenecks exist.”
Stanion is cautious on hedge funds and private equity: “Family offices led the way in allocating assets to these sectors, but I’m not sure they offer value at present.”
He said investors should put wealth preservation ahead of risk taking. Over five years, his core portfolio’s 12.9% return is only marginally ahead of global indices but its risk levels are 40% lower.
Stanion began his career as a building materials analyst at former broker Simon & Coates. He went on to manage US equities at National Provident, moving to Invesco, to work alongside top strategist Nicholas Johnson in 1987.
“I didn’t anticipate the crash of October 1987, but I certainly learnt a lot from it,” Stanion said. He followed Johnson to Pictet in 1993, to manage global diversified accounts. In 1998, Stanion became head of asset allocation at Paribas, bought by BNP, a rival French banking group, in 1999.
Stanion recalls becoming bullish on equities during the depths of the Russian debt crisis: “I was walking in the Dolomites at the time. When someone told me the news, I told my people to get buying.”
Stanion changed tack in 1999: “The United Nations pension fund was one that agreed to cut its position after I told investors to go underweight. I reckon it’s the best call of my career.”
One consultant said: “Stanion is one of the best strategists I know. He never gets stuck in bullish or bearish positions.”
Michael Hughes, former chief investment officer at Baring Asset Management, recruited Stanion to head strategy in 2001. At that point, Baring was reeling from poor performance and defections but Stanion’s arrival helped boost its credibility. Stanion reckons that ING’s sale of Baring Asset Management to US-based Massachusetts Mutual was another fillip: “They have been exemplary owners.”
Stanion now heads Baring’s multi-asset group, as well as chairing its seven-person strategic policy group: “I make the final call, but we take a collegiate approach, driven by data models.”
Stanion rode with the bulls following cuts in interest rates in 2000-2001 until February 2007, when he spotted potential problems in sub-prime mortgages and took credit risk off the table: “For a few months, that was costly but we knew the credit market was stretched and we stayed with it.” He currently only invests in a limited quantity of short-dated corporate paper.
Stanion retained faith in Asian economies until late last year, when he began to get worried about inflation running into the teens. “The Asian central banks have been slow to get a handle on it. In fact, if you look around the world, Brazil is the only country to have moved aggressively due to memories of hyper-inflation.” He said oil subsidies have been proving costly to countries such as China and India. Although subsidies are starting to come off, they are still damaging economies.
He reckons the oil-producing economies in Russia and the Middle East can withstand the inflationary strain for now. But peripheral economies, notably Egypt, are in grave danger. The European economies are facing sharp interest rate rises, as central banks seek to demonstrate anti-inflation credentials.
Stanion has battened down the hatches by restricting equities to 25% of his portfolio plus an additional 5% in agricultural stocks, where he has started to take profits. His property weighting is 3.7%. Government bonds comprise 31% of the portfolio. Cash and near cash are an additional 19%, gold is 5% and currencies 3%. Index put options and commodities total 3%. It amounts to Stanion’s most bearish stance since he joined Baring five years ago.
He said: “There is a growing shortage of credit. The situation reminds me of France during the long period of attrition which coincided with its decision to shadow the German mark in the 1980s.”
Over the years, Baring has allocated money to hedge funds, structured product and private equity.
But Stanion feels that hedge funds in aggregate will only make modest returns in volatile markets as lenders pull finance away. He is even more nervous of private equity, reckoning portfolio companies could be starved of credit when refinancings fall due.
Storm warning from Stanion
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