Return to fundamentals

29 January 2010 8:00 am

Tony Nutt of Jupiter has a 25-year-plus record of running money, having joined the firm in 1996 and inherited the income fund from William Littlewood in 2000.

Since then, he has seen assets approach £3bn and his long-term approach - basically, seeking real returns for clients - has won many admirers in the investment community.

Looking at this year, Nutt remains reasonably cautious on economic recovery, casting a particularly concerned eye at what he sees as very speculative activity in emerging markets.

He highlights recent work from Morgan Stanley that predicts 20 per cent earnings per share for equities in 2010, at the low end of the scale for the first year of GDP recovery.

“Last year saw substantial cost-cutting by many companies, allowing them to stay resilient on profits, but top-line growth drives markets and revenue recovery is yet to emerge,” says Nutt.

However, he feels balance sheets are generally strong now that many companies have refinanced, and dividends will start rising this year.
Nutt deems dividends a key indicator of corporate thinking, and currently sees revenue growth followed by distributions as most important for 2010, with EPS growth a distant third.

After the worst decade in history for equities - including the TMT bubble bursting and the credit crunch - he expects greater focus on fundamental investing as opposed to speculation.

“Recent events in Dubai highlight this, and I struggle to see where the demand for such markets will come from in future,” adds Nutt.
“I see some of this kind of speculation in emerging markets, with several commodities approaching all-time high levels. That said, people should remember China is a planned economy rather than a free market, so the kind of irrational exuberance seen in the West will not be allowed.”

Against such a background, he predicts that traditional value areas will outperform cyclicals, as will stocks that give growth at a reasonable price.

On the macro front, he says it is hard to predict how sustainable economic growth will be once the authorities begin to withdraw unparalleled stimulatory measures.

Another possible issue is if demand fails to emerge after the current period of inventory rebuilding by companies, which could spark another downturn.

Although Nutt expects a fairly fragile recovery, he is not predicting anything calamitous this year, highlighting a slow deleveraging process at corporate and consumer level.

“There remains enormous overcapacity in areas such as airlines and motor production, and I expect a modest, dragged out recovery as that readjusts over the next 18 months or so,” he adds.

In this environment, Nutt sees oil, gas, beverages, telecoms, insurance underwriters, pharma- ceuticals and some transport stocks as best placed to support dividends with their strong cashflows and low levels of debt.

Nutt’s investment decisions are made with a long-term perspective and he remains convinced that getting out of miners in 2007 will prove to be the right decision based on his commodity bubble stance.

He also starting taking positions in pharmaceuticals again in 2008 - after 12 years of avoiding the sector - believing that many companies have altered poor business models.

“After a long period of declining returns, stocks are now developing successful products again but valuations remain very low, as they had previously failed to do so for over a decade,” he added.

“We see real value in many companies, with a stock like AstraZeneca scheduled to have a third of its market cap in cash by 2015.”

On banks, despite a strong rally last year, Nutt feels similar sweeping changes to models are required, whether that might focus on bonuses, return on equity or dividend distribution.

Overall, he believes they must become more prudent businesses, with less speculation and products that accurately reflect credit risk.

Nutt made a prediction in 2000 - after the TMT bubble burst - that markets would not regain those highs during his working lifetime and he stands by this after a flat equity decade.

“To reach a new all-time high, we would have to see much higher mining valuations or ongoing speculation in China but I cannot see that happening,” he adds.

“My view is that investors will increasingly return to more fundamental value plays and solid dividend-paying companies rather than chasing speculative areas like steel producers, creating a solid period for income portfolios.”

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