Jupiter’s chief investment officer John Chatfeild-Roberts has offered an insight into his asset allocation thinking in his first update of 2014.
Chatfeild-Roberts accepted that in the medium term the investment world will be heavily influenced by the actions of central banks.
‘[Central banker’s] policy decisions, particularly those of the US Federal Reserve, will continue to affect significantly the future direction of equity and bond markets,’ he explains.
‘Despite the US central bank’s decision to cut back marginally on its massive bond-buying programme, known as quantitative easing (QE), from $85 billion to $75 billion per month, it is important to hold in the back of one’s mind that we are in the midst of a huge monetary experiment, the results of which are uncertain. Few, if any, understand the long-term implications of QE.’
Against this uncertain backdrop Chatfeild-Roberts said companies need to the ‘up their game’.
He highlighted the fact that most of the strong rise in equity markets last year was due to multiple expansion. This has seen investors happy to pay a higher multiple of current or future expected earnings in order to gain access to the potential for dividend and earnings growth.
‘This pattern cannot go on forever even if it proved a lucrative driver of returns over the last 12 months,' Chatfield-Roberts stressed. ‘Growth in corporate profits would have to materialise in 2014 on the back of stronger global growth to justify those higher multiples.’
Chatfeild-Roberts put a microscope on some of the key markets, which he believed will drive the world economy in 2014 and present a range of challenges and opportunities.
US: boost from falling raw material, energy costs
‘[The] US economy is benefiting from a slowdown in Asia, more specifically China. Raw material costs have dropped for US manufacturers. This has also coincided with falling energy prices through the availability of cheap oil and natural gas, as a result of the development of fracking technologies, which is enabling US energy producers to tap into huge reserves at low cost.
‘Wage inflation in China has also escalated, which combined with the energy advantage is helping US companies become considerably more competitive. As a result, US corporates are in good shape but they need to have the confidence to invest their cash balances, and this is definitely taking quite a time.’
Japan: inflationary policies are delivering
‘Japan has been struggling with deflation for many years but this looks to be changing as a result of a policy of unprecedented monetary stimulus that was launched by the Bank of Japan under the direction of Japanese Prime Minister Shinzo Abe.
‘There are signs that mild inflation is being successfully injected into the veins of their economy. The stock market has responded with a renewed sense of optimism and valuations are reasonable relative to other developed markets. We believe that Japanese equities have the potential to deliver decent returns to investors in 2014.’
‘As China’s economic growth slows and its focus switches towards targeting more domestically orientated growth, the world is again enjoying a deflationary influence. As the rate of its commodity consumption wanes, industrial commodity prices could fall.
‘This would once more lower price pressures in the developed world, meaning inflation targeting central banks would be likely to keep their foot firmly on the expansionary policy pedal for longer. The extra money printing will probably end up pushing asset prices higher.’
UK: opportunities come at a price
‘The UK economy’s health is improving, but it still has the same backdrop as the US, namely significant monetary easing.
‘UK government stimulus through the provision of mortgage guarantees has kick-started parts of the property market and this is now feeding through into other sectors of the economy which are benefiting from an improvement in consumer demand. Employment levels are improving, the consumer is feeling more confident, and the UK economy is gaining traction.
‘The UK stock market is by no means as cheap as it was but I believe there are still opportunities for active fund managers to pursue.’
Chatfeild-Roberts runs a range of fund of funds for Jupiter including the Citywire Selection Jupiter Merlin Income Portfolio, which has returned 68% in the five years to the end of November versus a 72% rise in the benchmark.