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Black Monday scenario ‘increasingly likely’ for markets

Laura Dew
Written By:
Laura Dew
Posted:
Updated:
25/11/2014

Barings multi-asset manager Christopher Mahon has warned the chances of a fresh Black Monday-style crash are rising, as policy decisions increasingly drive markets.

He suggested any new financial crisis would more likely be triggered by policy errors than by an overleveraged banking sector.  

Mahon (pictured) said the regulator is working hard to learn from the mistakes of the period post-Lehman Brothers, but has forgotten the lessons of earlier crises.

“It will be less about the financial system and undercapitalised banks, as we are on top of that risk.

“The regulator is always chasing the last crisis. But, as one generation learns, a generation forgets.”

On Black Monday in October 1987, the Dow fell by more than 20 per cent in one day, and most major exchanges worldwide experienced similar crashes.  

Mahon said: “I expect the next market crisis will be less like Lehman and more to do with policy mistakes. It will be more like what happened in 1987, where policymakers no longer reassure the market and it reacts negatively, strongly. That is looking increasingly likely as the years go by.”

His views follow comments from Prime Minister David Cameron at the latest G20 summit that the world could be heading towards another global financial crisis.

Cameron said there is a “dangerous backdrop of instability and uncertainty” prompted by a slowdown in the eurozone and emerging market economies. This is coupled with geopolitical problems such as conflict in the Middle East, and tensions between Russia and Ukraine.

Mahon took over the Baring Multi Asset fund from Percival Stanion, Andrew Cole, and Shaniel Ramjee in September when the trio departed for Pictet. Since then, the portfolio has shed two-thirds of its assets to shrink from £1bn to £360m.

Mahon admitted the start of his tenure has seen him “in defensive mode”, handling redemptions.

“The past three months we have been in defensive mode, reassuring clients we have a very capable team. But from 1 January we will be open for business and looking to raise money again.”

The fund has returned 4 per cent over one year to 18 November, according to FE, versus a sector average of 4.5 per cent. Mahon said some mis-timed purchases at the start of the year had weighed on returns, but added these themes are now starting to turn around.

“We were cautious on sterling and challenged by our Japanese holdings, but both of those have come back over the last month.”