Jupiter chief executive Edward Bonham Carter says the maintenance of low interest rates is more important to equity returns than a strong economy or corporate earnings’ growth.
Bonham Carter says the justification for equity exposure in a portfolio is as strong as ever, given that inflation is currently averaging between 0 and 4 per cent.
He says: “Equities tend to do well in those environments. It may surprise people who think you need strong economies and strong corporate growth to have a bull market but that is not necessarily the case.”
Bonham Carter says the market is awaiting the withdrawal of quantitative easing, which has been essential in keeping interest rates low, and questions what impact it will have on inflationary forces.
He says he does not expect inflation to be a worry for a year or two, highlighting high unemployment and spare capacity usage rates for
factories and businesses.
Bonham Carter says: “I do not see wages going up for the next year or two. Also if you look at bank lending, you have this paradox that the authorities have ‘printed money’ and been prepared to stand behind the main banks in terms of creating reserves. But if you look at bank lending to individual and corporate customers, it is still anaemic. As people cannot access the banking market, they enter the corporate bond market.
“Much of the growth we have seen in the late 1980s and the early part of this decade was created and bought by high levels of bank borrowing and I do not think we are going back there for some time.”
Bonham Carter says we were bound to see a recovery from the dash for cash but says, in the longer term, the devel- oped nations will remain restrained. “This is why interest rates will remain lower for longer. It is quite possible that the economy will not be as strong as people think it will be next year.”
Bonham Carter also believes that growth investing is going to come back into vogue and says he would favour companies that produce a top-line profit in the region of 5 to 7 per cent thanks to having greater pricing power or simply offering the same service to a greater number of clients.
He says: “Growth is going to be hard to come by in the Western world and people will pay out for quality companies in terms of their business franchise and their competitive position.
“They will be hard to find and I would expect them to widen their valuation gap against the average.”
Bonham Carter sees income as a particular attraction, pointing to dividends giving some inflation protection as they grow in line or at a greater rate.