Jupiter Asset Management chief investment officer John Chatfeild-Roberts says the multiple expansion seen in equity markets during 2013 must now be justified by corporate profit growth.
The strong returns from equity markets last year were primarily led by multiple expansion, according to Chatfeild-Roberts.
He says: “Investors have been happy to pay a higher multiple of current or future expected earnings in order to gain access to the potential for dividend and earnings growth.”
However Chatfeild-Roberts believes these multiple-driven markets “cannot go on forever”, arguing that corporates must now “up their game” to deliver profit growth as a support for the higher multiples.
He says: “This pattern cannot go on forever even if it proved a lucrative driver of returns over the last 12 months.
“Growth in corporate profits would have to materialise in 2014 on the back of stronger global growth to justify those higher multiples. ’
There are also signs that corporates continue to lack the confidence to invst in their own businesses, says Chatfeild-Roberts, particularly in the US where companies are benefitting from economic improvement.
He says: “US corporates are in good shape but they need to have the confidence to invest their cash balances.”
Chase de Vere head of communications Patrick Connolly says: ”Stockmarkets have gone up a lot on the back of the global economic picture and also general improving sentiment.
”However if we don’t see improving earnings this year this will impact on stock market performance, so this is hugely important.”