The S&P/ASX 200 Index is now 31.8 per cent above its 2020 bottom and just like Wall Street, fund managers think the path to future gains is highly uncertain.

“People will come back to spending faster than we thought they would. Some of this is coming back into markets,” PineBridge Investments global head of multi-asset, Michael Kelly, told a Morningstar investment conference on Thursday. He is focused on the large amounts of cash building in the US financial system.
Caution
Fund manager surveys also showed equity investors were cautiously positioned, as indeed was PineBridge.
“We are still underpositioned in equities but the message today is rotation,” Mr Kelly said. “The defensive sectors of the equity markets are extraordinarily overvalued.”
The companies that have been most attractive to investors looking for safety include technology and healthcare stocks.
Tony Cousins, chief investment officer at Pyrford, said that at the end of 2019, equities were “outrageously expensive” and Pyrford cut its equity positions back to 2008-level weights not long before pandemic fears really took hold.
“We would not for a moment say that we forecast the pandemic but when equities were as expensive as they were, they were clearly vulnerable and that’s why they fell so far and so fast,” said Mr Cousins.
Pyrford then moved back into equities, this time more aggressively than it did after the global financial crisis.
“Back in 2008 long-duration high-quality government bonds were giving a five per cent real yield. Today they are negative,” he said.
Too far?
He also worries the sharemarket rally may have gone too far, partly because companies have been cutting dividend payouts.
“We haven’t reduced our positions yet but we are getting very close to doing so. The market is [factoring in] a very sharp V-shaped recovery which, in the absence of a vaccine coming through very quickly, we cannot see happening.”
Large levels of debt are a big area of concern for the fund manager. He agreed massive government programmes backed up by huge monetary stimulus were the necessary bridge that had to be put in place to prevent a deeper economic downturn during the pandemic.
“The problem is that the longer that this goes on, the more rickety that bridge becomes and the bigger the build up in debt. So we are very concerned that unless there is a rapid return to work and output around the world then the recovery is going to be very, very slow.”
Matt Wacher, chief investment officer for APAC at Morningstar Investment Management, said that even though central banks and governments have done a lot to support economies, the fundamentals have deteriorated substantially.
Australia’s Federal Treasurer Josh Frydenberg declared on Wednesday that a 0.3 per cent economic contraction in the first quarter of 2020 heralded the country’s first recession in 29 years.
“We have been quite cautious in the areas that we have been adding to, making sure that there’s a margin of safety to overcome a deterioration in fundamentals in the medium term whether a vaccine is developed or not,” said Mr Wacher.
IT and healthcare are again getting expensive, he said. “From a reward to risk perspective, we prefer other areas given the valuation risk of some of those defensive sectors.”
Bonds expensive
And if equities appear expensive, bonds look even more expensive, said Mr Cousins. “We don’t want to be anywhere near duration. You could lose an awful lot of money.”
Bonds “are clearly not priced for any inflation. While we don’t see any inflation, if modern monetary theory really gets going, then you can create inflation.”
“The bond market is not priced for that and you will see massive capital destruction,” he said. “That’s why we are very short-duration within our bond portfolio.”
The government bond market “has been lobotomised as a matter of policy”, Mr Kelly said. The rates curves will be suppressed below inflation “for as far as you can see”.
“If you are putting money in that segment what you are really saying is that, ‘I am very comfortable that for the 15 per cent of the time that markets are risk-off, this will zig when everything else zags, but for the other 85 per cent of the time I’m happy to destroy capital in real terms’.
“In a sense, equity markets are the least dirty shirt.”