The company is siding with the bears on the issue of economic recovery, which has shaped its view of equity markets.
Cazenove multi-manager co-manager Robin McDonald says bullish investors believe loose monetary policy, low interest rates and Government bond yields, quantitative easing and liquidity will mean modest rates of economic growth.
In contrast, bearish investors say previous recoveries from recessions driven by asset deflation and credit contraction have taken years, not months. Recoveries from this type of recession have also been fragile, with the potential for sharp liquidity-induced rallies taking equities higher than they should be.
McDonald says Cazenove is leaning towards a bearish view because economic growth is weak and, without the stimulus from central banks, the economy would be vulnerable to shocks.
He says the market has priced in a sharp recovery, with levels of growth higher than expected. “The rally we have had has been driven by liquidity, which is the result of a re-rating of markets. It has not been driven by earnings and in some sense it is ‘show me time’, as earnings need to support the rally.”
McDonald says the higher than expected earnings produced by some companies have been driven by cost-cutting or have come from depressed forecasts.