Schroders head of UK equities Richard Buxton has called the beginning of a bull market in equities.
Buxton, who runs the £3.1bn UK Alpha Plus fund, predicted in 2002 that there would be a period where the equity market would go sideways and that while there has been a total return from the market over the last 10 years, it has been primarily made up on dividends.
He now predicts that we are now in the “foothills of a new bull market”. Buxton says that it is starting valuations, not the economic outlook, which are key to future returns.
Buxton says: “From today’s valuations, a PE multiple of 11 times, the next 10 years should provide positive real returns for investors, possibly double-digit per annum, despite the economic headwinds we face.”
He adds that growth could be subdued, but a lessening of extreme fears could see equities re-rated nevertheless.
These three fears Buxton flags are whether US can avert the fiscal cliff, will China achieve a ‘soft’ landing and whether Europe will make notable progress in addressing the sovereign crisis.
He believes that over the course of next year fears will reduce on all three fronts.
He says: “The US is likely to agree a fiscal policy which turns the ‘cliff’ into a gentle slope. 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. Stronger activity in the US could lead global growth in 2013.”
Buxton adds that fears of a ‘hard landing’ in China will ease with better economic data and modest policy stimulus.
He adds: “Against a background of improving activity in the US and China, even Europe may fail to dominate investor sentiment.”
Buxton says: “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.”
He says positive signs to watch out for next year are the Federal Reserve moving away from QE or signs that interest rates may rise sooner than as currently flagged in 2015.
He says: “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.”