Jupiter income manager Tony Nutt believes markets are about to enter “an air pocket” which will result in a fall in equity returns over the first quarter of this year.
He says the sovereign debt issue in Europe has not been resolved, pointing to countries still with problems such as Greece and Ireland and further support may be needed for countries such as Portugal.
Nutt says: “We are going to go into a big air pocket in February and early March in terms of returns as the markets battle with Portugal and Spain.”
“I think in the first quarter of this year the rescheduling of debt in Portugal, for example, must lead to heightened level of volatility for equity markets in Europe which will see them fall in that period. Whether they will fall to correction levels, I do not know.”
He says a eurobond package will need to be introduced to support struggling countries.
He says: “At the moment, the Germans are resisting that but ultimately it is the solution.”
Nutt says he was not surprised by the 0.5 per cent fall in UK GDP in the final quarter of 2010, citing reasons such as the winter’s bad weather and the announcement that VAT would rise from 17.5 to 20 per cent.
He says he does not expect interest rates to rise but does agree with Bank of England governor Mervyn King’s view that inflation is set to rise to up to 5 per cent later this year.
He says: “The numbers coming out of emerging markets are light in terms of economic data and the levels of inflation are higher than the reported figures in certain areas.
“There are clear cost push pressures and to raise rates at this point of time for this economy would serve no purpose.”