Chris Burvill, director of UK equities at Henderson, said a combination of factors could propel the FTSE 100 to record levels by the end of the year.
So far this year the FTSE 100 has traded in a range between 6,400 and 6900, and has never breached 7,000. But Burvill (pictured) expressed confidence that it could surge past that number and up to 7,500 over the next six months.
‘If I have this right, in the autumn we will see an upturn in earnings, sterling weaken, and gilts weaken,’ Burvill said.
‘A lot of this depends on everything going right, but I think it is absolutely achievable.’
Burvill acknowledged that the market had disappointed since January, gaining just 1% over the year to date.
‘The simple reason is that we all hoped that by now we would have seen some earnings growth,’ he said, and observed that there were ‘lots of excuses’ such as the strong pound for why earnings growth had yet to materialise. ‘My argument is be patient.’
For Burvill, sterling could indeed switch from being a headwind to a tailwind. ‘What was a negative is going to be a positive.’
He tipped the autumn for when corporate earnings would cease being tainted by unflattering year-on-year comparisons; over the past year sterling has strengthened by 10% against the dollar. Burvill also expected the euro to regain some lost ground as confidence in the single currency and continent’s economy recovered.
Additional support for the FTSE would come from increased consumer and business confidence, Burvill added.
The UK CBI Business Optimism survey is now in positive territory, while according to Thomson Reuters Datastream for the first time since 2011 more chief financial officers are currently favouring expansionary strategies such as launching new products than implementing defensive ones like cost cutting.
On the bond side, Burvill warned that there isa risk of gilts tumbling later this year, which could boost equities if money is reallocated from fixed income.
‘At some stage it is more likely we will get a rogue higher inflation rate,’ he said. That would also stoke fears of an interest rate hike, further hurting gilts. As a hedge against such an eventuality, Burvill has placed 9% of his £1.7 billion Henderson Cautious Managed fund in index-linked bonds.
On the equity side, Burvill said there is still ‘cracking value’ available in the FTSE 100. He cited Tate & Lyle as a ‘classic example’ of a stock valued only on current earnings, which overlooked the latent potential of its management and business.
Burvill similarly pointed to Rolls-Royce. ‘It’s fine to value it on current earnings, but don’t ignore the R&D going into the next generation of engines.’
Both have fallen by double-digit percentages since January after profit warnings, yet Burvill maintained that such companies could help the FTSE hit 7,500.
‘Mathematically it only needs a few of the large-caps to outperform,’ he concluded.
Burvill, A-rated by Citywire, has returned 26.6% over the past three years through Henderson Cautious Managed, a top-quartile performance compared with an average of 15.1% from its IMA Mixed Investment 20-60% Shares sector.