The Trojan fund star, who has returned 16.4% over the last three years versus a peer average of 7.2%, said he had begun the year with the most bearish asset allocation for a decade, and even if his worst fears are not realised, some apparent discounts in cyclical stocks may be illusory.
‘As we head into 2019, there is a great risk of recession,’ he wrote. ‘Time will tell if we have moved from a “buy the dips” bull market mentality to a “sell the peaks” bear market mentality. Current market action provides us with a strong hint.
‘[Fidelity Magellan fund star] Peter Lynch warns investors to be careful with cyclical businesses late in the cycle, however tempting bargains may look. This feels particularly appropriate at the moment when traditionally cyclical businesses, such as airlines and housebuilders, look myopically cheap.
‘The threat of a hard Brexit is clearly affecting current share prices and sterling, but by how much? Many of the factors above, concerning populism and trade, are also playing a part.’
Some of the downbeat message reflects lessons learned from the credit crunch. After successfully negotiating the volatility earlier in the year, the extreme volatility of the final weeks of 2018 led to all of the Troy funds, with the exception of Gabrielle Boyle’s Global Equity fund, ending the 12 months at a loss.
‘At Troy, our performance was relatively resilient as markets became more challenging. However, the final weeks of the year proved particularly difficult. We believe our performance should be viewed in the context of widespread negative returns for most asset classes in the year,’ said Lyon.
‘Our continued caution over valuations and risks to growth is reflected in portfolios going into 2019 […] the precipitous falls during the fourth quarter suggest that we may have seen the peaks of this cycle.’
He added that the unprecedented nature of the previous near-decade of easy money meant that history was not necessarily a good predictive tool for the market impact of tightening. Further clouding the forecast horizon is the apparent reversal of globalisation.
‘One only has to see the daily shifts in foreign exchange markets to know that politics now rivals central banks as the main driver of markets. Forward guidance has given way to the unplayable and unreadable outcomes of political whim.’
The challenges that gave rise to a generation of populist politicians were both broad and deep, as were the reasons the previous political elite found itself unable to grapple with them, he added. The consequences of the handover of power are likely to be equally multi-faceted, but for investors, the immediate impact is likely to be reducible to a handful of points, he said.
‘If globalisation is reversed, then global supply chains will have to be replaced by local, less efficient ones. Bringing home manufacturing, while appealing from an employment perspective, is unlikely to improve a country’s competitive position,' he said.
‘Equities are likely to struggle. Corporate profits may suffer, given the likely disruption to global supply chains. Lower growth is already leading to greater volatility. While the short-term implications of populism may be positive for labour at the expense of capital, the consequences of capital mis-allocation rarely benefit anyone in the long run.’