Several equity fund managers who run billions of pounds of investors' money have issued a stark warning equity markets are being blind to the risks faced by companies.
Mark Barnett, who runs the £5.6bn Invesco Perpetual Income and £11.2bn High Income funds, as well as the £1.75bn Edinburgh Investment Trust, told investors in his latest update not to be lulled into a false sense of security by rising markets and the boost to some UK companies of a fall in sterling.
While at the headline level the outlook for earnings growth is “positive” for a number of sectors of the UK market, he said much of that earnings growth will be the consequence of the drop in the value of sterling having a beneficial impact for many of the companies in the FTSE 100.
Gains from the fall in the value of sterling are “largely accounted for” by current equity market valuations, he said.
By contrast, he argued the risks are being overlooked.
“Too many risks are not priced into equities.
"The interest rate environment does not look helpful overall - the US Federal Reserve has now commenced a policy of raising interest rates, with further hikes expected this year.
"Geopolitical developments may also yet prove disruptive for business confidence.”
Bruce Stout, who runs the £1.75bn Murray International investment trust, has long been scathing of what he sees as global equity investors' overly optimistic view of the investment outlook.
Murray International has a global equity investment mandate, as opposed to Barnett’s funds, which are UK equity income funds.
In his latest letter to shareholders, Mr Stout said over the past month "an alarming deterioration in overall economic activity throughout the debt-dependant developed world continued to be largely ignored by politicians, policy makers and eternally optimistic global equity markets".
Mr Stout echoed Mr Barnett's concerns about potential interest rate rises.
Interest rate rises are generally viewed as negative for equities as they are likely to reduce the level of borrowing and spending in the economy, reducing aggregate demand.
Higher debt costs due to the cost of borrowing rising with interest rates may also leave some companies with less free cash from which to pay dividends.
Mr Stout continued: “Drunk on liquidity from lower interest rates...global equity investors embraced the momentum of relentlessly rising stock markets, causing numerous indices to be propelled through all time historical highs during the period.
"Blinded to the absence of supportive corporate earnings or dividend growth, consensus remained oblivious to significantly stretched valuations and the potentially dangerous consequences of rapidly deteriorating fundamentals.”
Thomas Moore, who runs the £1.1bn Standard Life UK Equity Income Unconstrained fund, took a more nuanced view.
He said those companies in the FTSE 100 that derive the greater part of their earnings from within the UK are pricing too negative an outcome for the economy, while the FTSE 100 companies that might be expected to benefit from the decline in the value of sterling already trade at a valuation he feels reflects the positives.
David.Thorpe@FT.com
