Inglis-Jones: Gloom could drive 40% equity fall

A continued deterioration in economic news flow could prompt a 30% to 40% swing in equity markets, according to James Inglis-Jones, manager of the £295m Liontrust Income fund.

He said in the event of such a big move, a tremendous buying opportunity would open up for investors.

"A 30% to 40% market swing would present a once in a lifetime buying opportunity. It would be dreadful, but it would be a buying opportunity," said the Liontrust manager.

"We would see valuations drop to single digit cyclically adjusted price to earnings ratios. This could happen if the nature of news flow continues to deteriorate in the way it has recently," he added.

He said one of the biggest headwinds currently impacting investors is the level of indebtedness faced by world economies.

"Never have countries seen such un-chartered levels of debt. To work our way out of this will be a slow and painful process," he added.

He said investors face a difficult dilemma at present because asset classes, including debt, equities and commodities, look the most expensive they have been historically.

"The market is not attractive right now. It is not as cheap as it looks. I would say US is expensive and Europe is fair value," he added.

Inglis-Jones has made some significant changes to his £295m Income fund recently as well as the £51m European Growth fund he co-manages with Gary West.

In his Income fund he now holds a concentrated portfolio of 32 stocks, after a radical overhaul in June to re-focus the fund on high quality defensive names, amid an increase in market volatility. He sold 20 stocks, bought 13 new names and retained just 13 of his original holdings.

"We sold out of some cyclical names to refocus on higher quality, cash generative companies," he said.

In his European Growth fund he recently cut his holdings from 38 to 26, saying he finds the best returns by equally weighting his portfolio across high conviction ideas.

The Income fund, which the duo have run since early 2009, has lost 3% over one year against a 2.4% average loss, according to Morningstar.

Meanwhile the European Growth fund has fared much better with 42% returns over three years, against a 19.4% sector average and losses of 7% over one year against sector falls of 10.6%.

Back in April Inglis-Jones introduced continental European names to the fund for the first time, adding seven European companies to the formerly UK-focused portfolio.