Jupiter: Inflation ‘critical’ to 2014 equity market gains

Inflation will be “critical” to the progress of equity markets in 2014, according to Jupiter chief investment officer John Chatfeild-Roberts.

In his latest commentary for the Merlin multi-manager funds, Mr Chatfeild-Roberts echoed the views of developed markets equity managers who have been warning of a need for earnings growth to sustain last year’s rallies.

He said inflation in developed markets was “inherently linked to the fortunes of China” as the country was so influential in commodity prices, which could in turn help cut input costs for some companies.

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“As the marginal buyer, and thus price setter for many commodities, it makes sense that as Chinese growth slows, or the nature of it changes away from pure fixed asset investment, their demand for commodities diminishes,” Mr Chatfeild-Roberts said.

“These commodities are the input costs for many developed world companies, so falling prices makes these companies more profitable. Not only would corporates benefit, but potentially also the all-important consumer - consumption being 72 per cent of US GDP - from the same falling input prices.”

The multi-manager added that investors were “therefore likely to be willing to pay extra for more profitable companies”.

However, he emphasised that “the prospects for 2014 appear finely balanced” and “risks can be seen from many quarters”.

This view has also led the multi-manager team to exit a position in Evy Hambro’s BlackRock Gold & General fund, which was initiated in the summer but closed out in November.

The only change to the Merlin multi-manager funds in December, according to fund factsheets, was the addition of a position in the Polar Capital Japan Alpha fund in the Jupiter Merlin Worldwide portfolio.

The move increases the £817m Merlin Worldwide fund’s Japan allocation to 16.4 per cent from 14.5 per cent at the end of November. The new purchase sits alongside longer-term holdings in the CF Morant Wright Japan and Jupiter Japan Select funds.