Snowden and Milburn: Markets still far from the bottom

Kames Capital's bond managers Stephen Snowden and Phil Milburn have warned it is too early to start buying up cheap stock as we are only 75% of the way through the European sovereign debt crisis.

Although Snowden described recent events as "easily one of the worst sell-offs in history" he said valuations are still not cheap enough.

The managers moved defensive in July, cutting exposure to financials and taking an extremely underweight position in banks while buying up AAA stock, and said they are "primed to buy" across all funds they run.

"There is tremendous value out there but there are also tremendous challenges. We will start to buy back into financials but they are not yet cheap enough to warrant the risk," said Snowden.

"We are probably 75% of the way through this. I do not think valuations will get as cheap as they did post Lehmans as there is not the same degree of credit overhang, and I have some faith in the market that there will be better discrimination between banks and different companies when it comes to selling."

Both said it is too early to consider buying, particularly high yield, until macroeconomic figures improve and European policymakers find a resolution

However, they added, there is also the risk policymakers could lead the region to yet another negative event if more is not done to salvage the economies of Ireland, Portugal, Spain and Greece.

"We have to bear in mind there is a risk of something tragic happening which could increase the risks disproportionately if European policymakers cannot find a way through this," said Snowden

"There is a risk of policy mistake, they are still in the denial stage. They need to realise we cannot have monetary union without fiscal union," added Milburn.

Milburn also said although we are not yet near the bottom, Europe is set for a "shallower recession" compared to the last one, but there will also be "no big recovery".

"The whole Lehmans event was a supply shock, a huge contraction as the funding market dried up. Everyone started dumping stock. The rebound through 2009 was the rebuilding and restocking boosted by fiscal and monetary stimulus.

"We had that short-term supply shock followed by a long-term demand shock. Companies have generally done their deleveraging and now it is the turn of the governments."

He added more stimulus is almost inevitable to avoid "demand falling off a cliff".

Aegon Asset Management became Kames Capital on 1 September.