Mott has reiterated his view that we are set for a period of anaemic growth over the next five years and has repositioned his portfolio more defensively with over 85 per cent of the 70-stock fund now sitting in FTSE 100 companies.
The income guru has dismissed the ‘bulls’ view that the current market is not dissimilar to the early stages of 2003 and 2004, which saw a flood of liquidity on the back of the TMT collapse.
He says: “It is my view that this autumn 2009 rally cannot continue for much longer, simply because very low interest rates were not the sole cure that helped us recover from the last bust. Governments have had to take on enormous amounts of debt to bail out the banking sector. Many government deficits are now at levels where it is essential that long-term deficit reduction plans are implemented to restore credibility. The Bank of England has already spent £175bn on quantitative easing: this too will have to end – you cannot print your way to prosperity.”
“So although we accept that inflation is not an immediate problem and interest rates are likely to stay low for the immediate future, the other two drivers of the recent rally, global fiscal easing and quantitative easing, will have to end.”
Mott says that instead of the heavily touted V or W shaped recoveries, there is actually a 75 per cent chance of a square root shaped recovery with a “gently sloping upwards line rather than a flat line”.
Mott says the seven month rally has proved that momentum investing was not killed off by the previous asset bubble. However, he says that those who are aggressively chasing the rally must be aware that continuing to buy over-valued assets requires the ability to be able to sell before the inflection point at its peak as the drivers of the market are not sustainable.
Mott says he intends to continue lowering the stocks in his portfolio with numerous traits, such as remaining heavily weighted towards overseas earnings, outsourcing companies and those firms’ with unique business models prominent.
He says: “We think that the risks are building of a market correction if some announcement is not made over the next few months to suggest that some of the economic stimulus is being removed. We believe that putting Quantitative Easing on hold would be a good first step and, although the market may react negatively in the short-term, it would signal that the authorities are determined not to let another asset ‘bubble’ develop.”