This bull market smells a little stale

As equity markets around the world rise to fresh all-time highs, or at least revisit levels not seen for a decade or more (in Japan, for example), many prudent investors will be ruing their caution over the past few years and may consider throwing it to the favourable winds that are blowing through the markets.

But is there not a faintly unpleasant odour if you breathe in deeply? This is a pretty stale equity bull market, underpinned by various and continuous doses of quantitative easing (QE) over the past six years.

It's anyone's guess what will happen when these QE injections stop and are then reversed - when central banks want repayment for all those government bonds they bought with newly minted money.

But the first signs of how markets might react will come when central banks, principally the US Federal Reserve, get closer to raising interest rates.


September is the best guess for when the Fed will raise rates, and as fresh spring turns to steaming summer it's likely to focus minds on the durability of equity market valuations around the world.

It will inevitably lead to plenty of calls to 'sell in May and not come back until St Leger Day' in September.

But that is not the only difficult section of the 'wall of worry' for equity investors to traverse. European stock markets seem far too relaxed about the ramifications of a Greek debt default and the risk of that leading to the bankrupted country's exit from the eurozone.

The price of Greek government debt maturing in July 2017 has fallen so far that it now yields (a notional) 27 per cent, while the benchmark yield on 10-year bonds is 12 per cent.

Despite the European Central Bank's assertion that contagion can be contained in a Greek default, the consequences within and outside the eurozone look quite scary to me

Expect to see yields on 'safe' German government bunds driven down further into negative territory.


Next up on the worry wall is the outcome of the UK general election. None of the potential outcomes looks like providing a stable environment for sterling, shares or gilts. Arguably, that is already reflected in valuations: in relation to the performance of other global markets, the UK market is at its cheapest since 1990.

Globally, too, many investors are concerned about the underlying quality of corporate earnings: chiefly, are those lofty forward earnings multiples on which equity markets are trading justified?

All of the above are obvious trigger points for a period of volatility; but for investors who have climbed the wall of worry to the sunlit upper reaches, other malodorous winds are swirling and could converge to blow them off.

From an easterly direction, China's financial sector looks increasingly unstable. From the west, the US stock market has been becalmed for several months and is awaiting confirmation of good news already priced in. Technical factors surrounding poor liquidity in corporate bonds could also provoke a storm.

Above all, however, investors seem to be suffering memory loss, forgetting that bear markets are not a pre-crisis phenomenon. This bull market mindset ignores the fact that economic growth since the financial crisis of 2008 has been a reflection of rising asset prices, rather than growth in credit and in productivity. That is what drove economies and markets higher before the crisis.

This is one of the points made by the managers of the CF Ruffer Total Return fund. Investment directors David Ballance and Steve Russell note with some trepidation that markets are marching, as directed, to the central bank tune - and they are not particularly comfortable with the current high tempo. They've raised cash levels in this £3 billion multi-asset fund as protection.


Such multi-asset funds are one of the most sensible ways in which private investors can attempt to counter the financially repressive policies of central banks, which force savers and investors seeking a decent yield into more risky asset types, thereby pushing up their prices and creating the illusion of prosperity. But assessing the respective merits of these funds can be daunting.

Some specifically target yield generation, with various levels of investment risk attached. Some will stick to pre-defined parameters of exposure to asset classes such as bonds, equities, property and cash. Others are more opportunistic, investing in asset classes and markets they feel offer the best prospects.

This latter cohort of mixed-asset funds tends to be either growth-oriented or to have a total return mandate, which means they do not aim to generate a specific yield, but are invested for capital growth and income generation.

They are arguably well-suited to investors who recognise that over-reaching for yield in this age of financial repression raises the risk of capital loss. That is a major consideration for pension investors seeking to maintain decent levels of capital to generate income throughout retirement, or to leave something to pass on when they die.

As a starting point, assess the merits of the 20 Rated Funds in our two mixed-asset groups, comprising 10 funds and investment trusts in each of the lower- and higher-risk categories.

Multi-asset funds are a good starting point for less confident savers who want to find ways to draw income from newly unconstrained pension pots. They are also a sensible option for investors who realise that de-risking an equity portfolio could mean losing out on easy gains if they time their re-entry poorly.

Just as importantly, mixed asset funds (particularly those with capital preservation in mind) should also provide protection for those who fear the whiff of ordure on the investment wind could soon become a stench.

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