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Investors may be wary about the elevated state of the stock market but M&G Investments manager Eric Lonergan said they will look back at this time as a ‘golden era of stability’.
Citywire A-rated Lonergan, who is head of multi asset research at M&G, said ‘behavioural bias’ has kept investors trapped in a pessimistic mindset where they expect another recession, despite facts to the contrary.
He believes the current economic backdrop in the UK, US, Japan and Germany is ‘near perfection’ with ‘stable and persistent growth, close to full employment and low inflation’, which would not have been dreamed of 20 years’ ago.
‘That is economic perfection,’ he said. ‘But you have this narrative of secular stagnation and that we will all be replaced by robots.'
He added: '2% US GDP growth is not stagnation.’
Lonergan also believes investors are too pessimistic about technological advances that are being made, with the rhetoric geared towards job losses.
‘People see the jobs that may be lost but not those that may be created. If you look at economies with the greatest technological diffusion, they are close to full employment.’
Lack of growth and robots causing widespread unemployment are ‘two hypotheses that are false’, said Lonergan.
‘We have secular stability, where you have stable and consistent growth.’
This distortion in investors’ outlook is due to the residual memories of the 2008 financial crisis, which has left them ‘mentally scarred’, believes Lonergan.
‘Since the financial crisis, the system has been reacting like an organism that has been attacked, and it is trying to heal itself and prevent a reoccurred,’ he said.
‘The mental scars associated with 2008 will last a long time, which suggests when people look back [on today] it will be seen as a golden era of stability. But people are not thinking about that, people are thinking about 2008.’
Exploiting behavioural bias is the way which Citywire A-rated Lonergan aims to deliver returns through the three multi-asset funds he manages, M&G Episode Defensive , and co-manages; Episode Growth , and Episode Macro .
He argued that multi-asset manager cannot claim to have a ‘research edge’ as they ‘operate in the most information efficient part of the market’ and so he has turned to human psychology, which he described as ‘the least objective and analysed part of the financial market’.
‘We do not believe in forecasts and put a lot of emphasis on human psychology: how people think and feel and the errors they make, and on their perception of risk,’ he said.
This has led to a contrarian investment approach where the areas that are seen as most at risk are the most attractive.
‘Everyone talks about the financial crisis, which means the probability of its happening again is very low, and that is a huge opportunity for investors,’ he said.
Lonergan said he benefited from holding US banks post-crisis when people were concerned that they were too risky. Following the crisis, they were forced to increase their capital ratios and more conservative management teams were brought in, de-risking the banks and the investment.
‘You end up with a banking system that is de-risked and regulation that is on the side of the investor,’ he said.
‘People do not want a recession to happen again and when people are most afraid of a recession, the probability of it happening is at its lowest – that is the psychology of probability.’
He still has ‘a big exposure to financial in the US and last year we increased our exposure in Europe and that remains valid’, adding that he would not be surprised if banks went ‘to higher price/earnings ratios’ as ‘people’s perception of risk is still very elevated’.
Lonergan (pictured) is similarly upbeat about the technology sector, where concerns about the sustainability of valuations and pace of growth has caused investors’ concern.
‘The tech sector is still interesting because it observes a behavioural bias,’ he said. ‘People think the tech sector is risky because it is new technology…because it is new and growing rapidly does not mean [the tech stocks] are not safe.’