“The US economy is at the late stage in its cycle, so the probability of losses are now quite high. Based on preliminary earnings forecasts and with the markets already trading on multiples of late teens to early twenties, the returns on US equities are likely close to zero over the next three years,” Simon Doyle told FSA in an interview.
Dolye, who manages the $194m Schroder ISF Global Target Return Fund, favours a defensive strategy as the US economy slows this year — pulling the global economy lower too — and in expectation of a likely recession in 2020.
“Several forward-looking indicators are significantly negative,” he said.
“These include an inverting US yield curve and also a high number of truck sales — which is historically one of the most accurate measures of an over-heated economy.”
The inference is that interest rates will need to rise to curb inflationary tendencies.
His fund, which aims to achieve an annualised 5% return over 3-months Libor, is now around 50% invested in US Treasury bills and notes and 7% in cash. It has a mere 22% exposure to (mostly US) equities, preferring to gain corporate exposure through credit.
“However, we are cautious about this sector too, because yields [of 4% – 5%] and spreads are historically low,” he said.
Although Doyle sees pockets of value elsewhere, notably the Japanese equity market which is trading on a multiple of 12 times earnings, the US dollar and short-term treasuries provide him with the safest haven.
The fund might turn even more defensive later in the year.
“On a scale of one-to-10 [with 1 most defensive], we are currently three-to-four; we will shift to one-to-two if the indicators deteriorate further,” he said.
In that case, retail investors might be tempted to simply stick their cash in the bank or into a low-cost money market.
“However, a professional manager can better identify when to add as well as reduce risk,” said Doyle.
“Furthermore, value-style investing is returning to fashion as the earnings-driven bull market comes to an end, which requires skilled active management,” he added.
Schroder ISF Global Target Return Fund vs Benchmark and Sector Average