Invesco Perpetual’s Mark Barnett has said investors should not expect the same level of returns they have seen from equities in the past couple of years.
The manager, speaking on a client webcast, said much of the returns in the UK equity market had come from a rerating by market participants which means prices of company shares have been rising without an improvement in fundamental aspects such as earnings.
“The bulk of the price move has come as a result of multiple expansion - a rerating of the price-to-earnings ratio,” he said.
“Very little has come as a result of earnings growth and a key feature of the market has been a lack of profit growth.
“My hunch is that we are looking at the expensive side of fair value.”
The manager said he did not think small and mid caps would continue the level of outperformance against their larger counterparts meaning his view on overall equity returns had become more bearish.
“We should not be gauging our expectations off what we have seen in the past two years,” he said.
“This year might be more modest for returns.”
Mr Barnett said the argument about the attractiveness of equity valuations relative to bonds - one he admitted he had used - was “a lot less strong”.
“You need to be careful about where to put your money. Valuations have risen to a level where if there is no earnings growth there will be price vulnerability and we will see the scope to lose money if we don’t see earnings growth to back up what you are paying for a stock,” he said.
The manager, who is set to take on Neil Woodford’s Income and High Income funds in May, added that he thought economic growth in the UK was “as good as it is going to get”.
“I expect growth of 1.5 per cent in 2014 is realistic rather than the figure [1.9 per cent] which was registered yesterday,” he said.
“My caution is because banks are not really lending. Bank lending is crucial in our economy and to kickstart a self-sustaining recovery.
“Credit in aggregate is not growing. There is more in the mortgage market but small business lending is still under pressure.”
He added business investment had not picked up and while inflation had reduced there was no mmediate pressure he could see on companies to raise wages more than they already had.
Elsewhere, Mr Barnett said Mr Woodford was in control of dealing with redemptions from the flagship Income and High Income funds.
He added that if he head to deal with outflows when he took on the funds he would do so as Mr Woodford had - in an “unpredictable and anomolous” way because “you don’t want to make changes where the market can see you coming”.