John Chatfeild-Roberts, Citywire A-rated manager of Jupiter’s multi-asset Merlin fund range, believes markets reached a peak on 26 January. As a result, he says investors must brace themselves for tougher times ahead.
His comments follow a volatile period for markets, caused by investor concerns about the implications of a more hawkish chairman of the Federal Reserve and the pace of so-called ‘quantitative tightening’. This phrase refers to the withdrawal of 'quantiative easing' or money printing.
In Chatfeild-Roberts’ opinion, there are three reasons why markets peaked on 26 January 2018. The first is the upwards trajectory of interest rates in the US, a trend which could have a significant effect on markets and the global economy.
‘We see this [US interest rates rises] carrying on for some time,’ he added.
Secondly, the fund manager points to the reversal of quantitative easing and the shrinking of the Federal Reserve’s balance sheet, which will withdraw a key source of support for risk assets, such as shares and bonds.
The final factor to consider is valuation, according to Chatfeild-Roberts (pictured).
‘You only have to look at the growth part of the indices to see that they are probably overvalued - and if you look at growth versus value in the US, the differential is back to where it was roughly in 2000,’ he says.
This date marks the height of the tech boom, where share prices of many technology and internet companies became completely disconnected from traditional valuation metrics, like the price-to-earnings ratio. However, from 2000 onwards, the bubble started to burst and the share prices of these companies plummeted. Cisco, for example, fell 86%.
Chatfeild-Roberts views the elevated valuations of growth-focused companies as a warning sign that trouble may lie ahead for markets.
‘Generally speaking we are positioned for tougher times,’ he added.
Brace yourself for more volatility
Bezalel described the sharp rise in market volatility in February as a ‘rehearsal for what we are going to see during the second half of this year’.
‘That is when the pace of quantitative tightening and the reduction of the Federal Reserve’s balance sheet goes into overdrive. In conjunction with that, they still want to raise interest rates in time,’ he said.
However, he believes it will prove difficult for the Federal Reserve to raise interest rates two to three times this year and do the same next year, at a time when they are shrinking their balance sheet.