Are we seeing a changing of the guard in markets?

We assess investment environment in the wake of the powerful rotation seen in global markets over the year to date.


Robin McDonald

Robin McDonald

Fund Manager - Multi-Manager

Are we in a bull or bear market?

For much of 2015, market leading stocks benefited from a benign atmosphere akin to the summer of 2007, while the laggards – principally in the commodities and financials sectors – were enduring fierce bear market conditions similar to those experienced in early 2009.

This left the market dangerously lopsided and in our view primed for a powerful rotation. Over the year to date, we have seen this largely pan out.

Stocks that led the market in recent years have suffered some extraordinary falls while many of the laggards have rallied sharply.

The Nasdaq Biotechnology index, for example, which rose by 330% over the previous five years, has fallen by 25% since the start of the year, while the Philadelphia Gold and Silver shares index, which was down 80% over five years, has risen by around 50%1.

To answer the question, ‘are we in a bull or bear market?’ based on stock movements since the start of 2016, you may therefore have to conclude both!

What does that mean for investors?

For many active fund managers, the implications of a continuing market rotation could be significant, with portfolios skewed towards previous leaders likely to face a sustained period of relative underperformance.

Over recent years, central bank policies have fostered an environment that has been very supportive of markets. This has driven the strongest risk adjusted returns from equities in over half a century.

With the US tentatively engaged in tightening monetary policy while a number of other economies are resorting to unorthodox measures, including the imposition of negative interest rates, in an attempt to stimulate growth, we believe that we may now be facing a sustained period of lower returns and higher volatility.

While the global economy continues to expand, albeit modestly, the benefits of unorthodox policies appear to outweigh the costs but their limitations will become more obvious when the business cycle turns down.

Where do the best opportunities exist?

The best opportunity we observe within the markets today is one of mean reversion2 from what are historically extreme prices, both high (bonds, the dollar) and low (value-style3 equities and higher-beta4 assets).

Assets that have benefited from a deflationary backdrop appear low-risk, but we consider them anything but. To us, they are overpriced, crowded and vulnerable under a number of possible scenarios.

Our current strategy is to balance what are otherwise relatively depressed and out of favour assets with sufficient cash such that we participate more when prices rally than we do when they fall.

This is the very essence of what we try and deliver over time, and will hopefully prove a fruitful strategy in what we expect to be a volatile year.

1. Source: Lipper 29 February 2016.

2. Mean reversion is the theory that prices and returns eventually move back towards the mean or average.

3. Value-style equities: Stock where investors believe the market has overreacted to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals.

4. High Beta: A measure of a stock's volatility in relation to the market as a whole.

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.