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Why this fund manager is preparing for a massive market crash

Is another massive market crash coming?

The S&P/ASX 200 Index (ASX: XJO) had another positive day, closing the day up 0.32% to 6,094 points. Since bottoming out on 23 March at 4,546 points, the ASX 200 is now up by 34%. It’s an incredible bull run, considering March brought us one of the sharpest and most severe bear markets in living memory. Despite its recent performance, the ASX 200 is still 9% below the level it was at the start of the year.

But one fund manager is betting that what he has labelled the markets’ “free pass” when it comes to the impact of the coronavirus pandemic won’t last forever.

An ultra-bearish fund manager

According to reporting in the Australian Financial Review (AFR), Rob Almeida, portfolio manager and strategist at MFS Investment Management, is calling time on the recent bull run in global markets. In fact, he sees another market crash on the horizon.

MFS is based in the US state of Massachusetts and has been around for around 90 years. Mr Almeida has one cardinal rule for his fund: “All that matters to investing is that you’re paying for future cash flows”.

And right now, he doesn’t see a positive outlook for cash flows at all. He’s also “having none” of the recent rally in global markets. In fact, according to the AFR, he has positioned his long/short strategy as “bearishly as possible”. The fund is sitting “in maximum cash and just 10 per cent exposure to equity (shares)”. The AFR quotes Almeida as stating the following:

One in three companies in Russell 10000 was unprofitable before the crisis. I can’t imagine that’s improved…I’ve got to believe we reach a point – I don’t know when – when investors stop giving companies and the economy a free pass on horrendous data… the quality of balance sheets, particularly in America, is the worst it’s been in over 100 years. There’s just no getting around that.

Almeida acknowledges the reckoning he’s been expecting for some months may not be entirely imminent. But with the level of conviction Almeida is placing within his fund on a dramatic reversal of market fortunes, I’m sure his investors are hoping he’s right.

Should ASX investors sell everything today?

I’m not prepared to follow Mr Almeida’s lead and liquidate 90% of my portfolio. However, I do think this gentleman has some good points, particularly surrounding cash flow. I like to invest in companies that are either producing healthy levels of recession-resistant cash flow today, or look to be able to in the foreseeable future.

The next year or 2 will be critical for many companies on the ASX. Some will be fine, but others will struggle and could even go under. And I do think it’s entirely possible we’ll see another market crash. We are by no means out of the woods yet with regards to the coronavirus. And there will be a point where the government can no longer afford to prop up the economy with record deficit spending.

So I’m not selling the farm just yet. But I am looking at my portfolio and seeing which businesses will be best placed to generate cash flow into the future, regardless of what happens within the economy.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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