What’s scaring fund managers this Halloween?
As Halloween approaches, fund managers are grappling with a variety of market concerns that are giving them more chills than thrills. While the global economy shows signs of improvement — such as slowing inflation and stabilising interest rates — there’s no shortage of uncertainties lurking in the shadows.
From the upcoming Autumn Budget in the UK to the ever-changing political landscape in the US, and unpredictable economic indicators across the world, the mood remains cautious. Some managers are looking to capitalise on potential opportunities, but many acknowledge the fragility of markets as we head into the final quarter of 2024.
Autumn Budget fears
Richard Hallett, manager of IFSL Marlborough Multi Cap Growth, is particularly concerned about the UK’s Autumn Budget. “The AIM market is already unloved, and the Budget worries are creating a freeze,” he says. Richard believes the key to reviving the UK market lies in government reform, especially when it comes to getting pension funds back into UK equities. “It’s the number one structural issue we have in this country,” he warns.
Retail investors continue to shun the UK. Another £629m left UK All Companies funds in August, after £654m left in July*. The latest report from Calastone painted a similar picture, with UK funds seeing outflows of £666m in September, the only major market to see outflows over the month**.
Victoria Stevens, co-manager of Liontrust UK Smaller Companies and Liontrust Special Situations, echoes some of Richard’s concerns. She notes the prolonged challenges small and mid-cap companies are facing, partly due to high interest rates. “There’s a massive valuation gap in the UK which looks attractive to our style” she explains, but admits her team is still cautious, as uncertainty in the air remains palpable. “At the very least, we’re approaching the bottom of the cycle,” she suggests, hinting that a fall in interest rates could offer relief.
Read more: stalled optimism and UK stock market uncertainty
Geopolitical uncertainty and US elections
Beyond the UK, geopolitics and the upcoming US elections are keeping managers on edge. Stuart Rhodes of M&G Global Dividend is laser-focused on these issues. “The US elections are not too far away, and markets don’t know who’s going to win,” he says, although many believe Kamala Harris could win, and might even have a Senate majority behind her. Stuart highlights the uncertainty around trade and fiscal policy differences between the two candidates and what that potentially means for markets. Stuart believes that although these events could cause short-term volatility, “being ready to capitalise on entry points” will be crucial for long-term gains.
While US elections remain a concern for some, Polina Kurdyavko, co-manager of BlueBay Emerging Market Unconstrained Bond, believes “markets have somewhat front-run one potential outcome that would include higher US yields on the back of further fiscal largesse. Within this context, emerging market fixed-income markets continue to trade relatively well, with spreads stable in the credit world, although there has been some weakness in local markets.”
According to the fixed income team at JPMorgan, investors can expect equally strong reactions in the US dollar, but in opposite directions. “Before the election, the US dollar is likely to trade choppy but as the election approaches, changes in the implied probabilities of the election outcome are likely to have an increasing impact.”
Nick Kirrage, co-manager of Schroder Income and Schroder Recovery, also weighs in: “There’s a lot going on in the world that feels scary — conflict in the Middle East and Ukraine, for example, but you don’t need to look far to be optimistic, particularly in the UK which is a diamond in the rough.” he says. Nick maintains that despite short-term turbulence, “the stock market, over the long term, goes up 8% annually. It pays to be optimistic.”
US labour markets and bond yields
Fixed income investors have their own set of worries. Dillon Lancaster, manager of TwentyFour Dynamic Bond, also points to US labor data as a key concern. “This spooked markets in August, and the labour data is really important for Q4; the US jobs report at the beginning of September was a key date in investors’ diaries last month” he says. “Volatile moves followed the report on the rates side, with the 10-year Treasury yield dropping by almost 20 basis points over the week to 3.71%, representing the lowest closing level since June 2023.”
The US Presidential election in November is also beginning to come into focus and could emerge as a key risk driver in the coming weeks. He notes that a “split government” outcome would be the most favourable for bond markets, as it could temper policy risks and lead to a more stable yield curve.
Ultimately, Dillion remains optimistic about bonds in general, stating that “yields are attractive in fixed income right now.” According to Bloomberg, bonds are now yielding more than their equity counterparts for the first time in 22 years. They added: “If bond yields rise significantly from here, and inflation recurs — which is exactly what should be expected after a Republican clean sweep — it will be hard for stocks to continue their advances. That’s not in the price yet, but if the current political narrative continues, it will be.”
Cautious optimism this Halloween
Nick Clay, manager of TM Redwheel Global Equity Income, argues that misallocation of risk presents the greatest threat to equity investors today. “What scares me is when markets are convinced that a particular outcome is a foregone conclusion, as this is invariably when risk is most elevated. Today, markets continue to push through all-time highs on the conviction that the Goldilocks outcome is a certainty that nothing can derail, impervious to geopolitical tensions, upcoming US elections, or slowing growth in many areas.”
Ultimately, while these fund managers each have their specific fears, there’s an underlying sense of optimism — albeit cautious. Whether it’s seizing opportunities in a volatile US election season, hoping for pension fund reforms in the UK, or investing in companies that can weather any storm, the message is clear: the future may look uncertain, but for those who stay sharp, it holds opportunity.
Even with Halloween’s ghosts of market volatility and economic instability, there are moments when clarity prevails. Providing the Autumn budget isn’t too scary, the Bank of England plays ball, and nothing too dramatic happens in the economy, the UK market should be able to find its feet again. As Richard Hallett says, “no further bad news will be like good news.” And for those prepared to navigate the dark, this period might offer the perfect opportunity to reap long-term rewards.
*Source: Investment Association, full figures, August 2024
**Source: Calastone, fund flow index, October 2024