Fund managers and fund buyers came together yesterday in Madrid for the Expert Investor Spain forum there, and if there was one thing to connect them it was their gloomy market outlook. While a poll showed that two thirds of the Spanish fund buyer audience expect another equity market correction of more than 10% this year, fund managers at the conference admitted it was a lot easier to identify lucrative short trades than good long ideas at the moment.
“It may be true that all risks create opportunities, but we have many more ideas on the short side now than on the long side,” said Charles Lacroix, a member of the investment committee at Rothschild Cie. Raphaelle Moysan, an investment director at Aviva Investors’ Multi Strategy Absolute Return Fund, also finds it easier to identify short bets.
“US biotech stocks have fallen a lot already this year, but there is still a lot of downside risk. So we are short these stocks,” she says. “We have also gone short a basket of digital disrupted stocks, companies that are challenged by digital revolution such retailers that haven’t gone big online.”
Stephane Fertat, fixed income portfolio specialist at T. Rowe Price, noted that investors have generally become more risk-averse, as they feel risk-return trade-offs are no longer attractive in most cases. “Investors are no longer trying to maximise returns,” he said. “It’s much more about capital preservation, and their time horizon has shortened as well. This puts a different pressure on portfolio managers.” Fertat said he continues to see opportunities, though only on case-by-case basis. “The argument for sector allocations are a bit weak.”
Talking risks, not opportunities
So little surprise that most of the discussion during the day was devoted to market risks rather than opportunities. And the one risk that is on everyone’s mind these days is, of course, Brexit. Recent polls showing a lead for the Leave campaign have resulted in a renewed drop in sterling and has sent equity markets and government bond yields down.
The upcoming Brexit referendum has also made Spanish investors nervous. The majority of delegates at the Madrid forum yesterday have adjusted their asset allocation in relation to it, with all of them believing equity markets will be hit by a Leave vote. In another sign the vote is considered to be tight, four in 10 of delegates believe Brits will vote for Brexit. This contrasts somewhat with polls conducted at previous forums this year, where each time a much bigger majority of delegates believed Britain would vote to stay in the EU.
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And like most Spanish investors, fund managers speaking at the forum are also taking caution. The Kames Capital Global Diversified Income Fund has reduced its allocation to some UK assets in the run-up to the vote, said Nick Edwardson, an investment specialist on the fund. “We have increased our short sterling, long dollar position, and have reduced the bucket dedicated to UK equity income,” he said.
“If indeed there is a leave vote, financial markets wouldn’t be able to function for a few days,” said T. Rowe Price’s Fertat. This would affect UK banks’ access to finance, he reckoned. “So what we’ve done recently is buying credit default swaps on certain UK banks.”
Click here to see a full overview of voting results from Expert Investor Spain.
And here you can see a slideshow of photos taken at the event.
