Richard Buxton, head of UK equities at Schroders, believes the three immediate concerns plaguing investors are overblown and will subside over the coming year, while equities are on the cusp of a new bull market.
The manager of the £3 billion UK Alpha Plus fund said fears over the impending fiscal cliff, a Chinese hard landing and Europe’s ability to address its sovereign and banking crisis will reduce next year.
‘The US is likely to agree a fiscal policy which turns the ‘cliff’ into a gentle slope,’ said Buxton. ‘Given that US banks are creating credit again and that an improving housing market is underpinning consumer confidence, a positive agreement will reassure US corporates.
‘Having held back on spending ahead of the Presidential election and the ‘fiscal cliff’ negotiations, a satisfactory outcome should see a resurgence in investment and orders,’ he added. ‘Stronger activity in the US could lead global growth in 2013.’
With regards to China, Buxton believes improving economic data and a level of policy stimulus should ease fears of a hard landing, especially as the country’s policy vacuum is now over, following its leadership transition.
‘Against a background of improving activity in the US and China, even Europe may fail to dominate investor sentiment,’ said Buxton. ‘Much progress has been made this year in the multi-year evolution towards fiscal union and the appropriate mix of austerity, reforms and fiscal transfers. Expect further progress in 2013.’
In contrast, 's James Harries, manager of the firm's Global Higher Income fund, believes the long-term trend for China is downward, and remains negative on companies, sectors and economies dependent on China.
One overriding worry, though, is the scale of debt in the West, which Buxton said ‘condemns us to weak growth for the foreseeable future.’
However, if the three concerns over the US, China and Europe fade, investors’ concerns over developed markets’ indebtedness may lessen.
‘Some modest acceleration in growth is key to deficit and debt reduction,’ said Buxton. ‘Undoubtedly, risk appetite will continue to ebb and flow with the macroeconomic data, but an improvement on the deteriorating trend of recent months would help reinforce a potentially virtuous circle of improved corporate confidence and investment.’
A boost from unlimited QE?
Although the Fed’s programme of unlimited quantitative easing – with a view to improve the jobs situation as part of its dual mandate – seemingly boosted sentiment in the short-term, Buxton believes one of the most positive signals next year could be the Fed walking away from QE, or raising interest rates sooner than 2015.
‘Now that US banks are creating credit once more, a signal that monetary policy is moving out of emergency mode back towards more normal settings may reinforce CEO confidence rather than undermine it,’ said Buxton. ‘One to watch in 2013.’
Are we set to see an equity bull run?
Despite the wider macro concerns, Buxton said these are reflected in prices and that economic growth does not necessarily correlate with equity markets. ‘Growth could be subdued, but a lessening of extreme fears could see equities rerated nevertheless,’ the manager said.
‘The fund flow statistics and negative sentiment towards equities suggest that the ‘pain trade’ for most investors is for the equity market to surprise commentators on the upside over the coming years because people don’t have enough equity exposure.’
He added: ‘I believe we can say we have already passed the low point for UK equities – below 3500 on the FTSE 100 index twice in the last 12 years – and are in the foothills of a new bull market.’