Fidelity’s equities chief Dominic Rossi has cautioned European equities are at risk of mimicking Japan’s during that country’s period of deflation.
In a phone conference today Mr Rossi said: “European equity markets are beginning to behave a bit like the Japanese equity markets of old.”
Japan experienced an asset bubble in the 1980s, which then peaked at the end of 1989. In the next two years the stockmarket fell more than 50 per cent and stock prices remained downcast for the next decade.
In this environment, Japanese companies held on to cash balances. When companies maintain high cash balances it is difficult to propel economic growth and kickstart a virtuous circle.
European companies are holding high levels of cash on their balance sheets and this is making Mr Rossi nervous.
Companies in Europe, the Middle East and Africa (EMEA) held almost €1trn (£797bn) in gross cash balances in September, according to Deloitte. This is up €300bn since 2007, before the financial crisis. Holdings have increased in the past 12 months, with 1,200 companies in the Bloomberg EMEA index adding a further €47bn of cash.
He said: “Japan made that mistake. It is encumbanent on the asset management industry to make sure these companies do not just sit on those cash levels, but they distribute them and get the cash flow going.”
The eurozone slipped closer towards deflation in September, according to data released from Eurostat today. The rate of annual inflation in the area slipped from 0.4 per cent in August to 0.3 per cent in September.
It is the lowest rate of inflation recorded in the eurozone since September 2009.
Mr Rossi said, however, there had earlier in the year been a potential worry about deflation in Europe, however, European Central Bank (ECB) president Mario Draghi’s moves to talk down the euro had helped.
“At the beginning of the year if the ECB didn’t take notice of the strength of the euro there could have dawned a deflation like that of Japan,” he said.
However, Mr Rossi thinks the area is better positioned than it was at beginning of the year.
“I am not nearly as pessimistic of European markets as I was a few weeks ago,” he said.
Mr Rossi said he was more nervous when the ECB was not taking action in spite of the strength of the euro.
But this fear was eased as in recent months the ECB reduced interest rates to record lows.
“We will feel the benefits of the weaker euro into next year. I expect the earnings in Europe will begin to trend up even if the macro numbers are weak,” Mr Rossi said.