Speaking yesterday at the Schroders London investment conference Buxton said the UK was in an “environment of artificial normalisation” but that economic reality will be tough and headlines will be grim over the next two years.
He said: “The banks, yes they can fund at the very short end but there is still a lot that has to be sorted out and we’re by no means back in a normal environment, nor will we be for some period of time.
“I think there’s going to be public sector strikes, there will be uncollected rubbish in the streets, winter of discontent type scenarios. I think there will be riots; I think it’s going to be very messy over the course of the next two years.”
The VAT rise, increased rates of taxation and higher rate taxation next April, and an election in May may see the savings rate grind upwards, said Buxton.
He said: “There will be substantial personal sector tax increases, the Government can’t do much on the corporate side because you now have an open competition for domicile and companies will just shift. We are in a mess.”
Buxton warned that banks are still in the process of deleveraging so credit growth will be very limited and he predicted public spending cuts to lead to at least 250,000 public sector job cuts.
He said fiscal policy is going to be tighter over the next couple of years and monetary policy is going to remain extremely loose.
He said: “Admitted, we’ve started a global interest rate upswing, but in the UK we’ll be the last central bank to be raising interest rates. Short rates are going to be anchored pretty near zero and long-rates for the foreseeable future are not going to exceed about 4 per cent.”
He expects inflation to return in the medium to long term but said: “it’s the only way we’re going to get out of the amount of debt we have.”
Despite the gloomy economic outlook, Buxton said liquidity will remain very benign with risk assets benefiting and equities supported.
He said: “We’ll be in that curious phase of the cycle where you don’t even know if good news is good news or bad news. I think the market is going to continue to surprise most people and be higher than they would believe justified given the economic reality.”
UK equity fund manager Errol Francis who works alongside Buxton said the UK market will be watching the US Q3 earnings reporting season which kicked off this week and could take another leg up if there are signs of stabilisation and more sales recovery.
With this backdrop, Buxton’s £1.7bn UK alpha plus fund has been shifting out of some cyclical shares in the portfolio at the margin. However Buxton and Francis have insisted this is not a wholesale portfolio shift from cyclical and financials to defensives.
Buxton said: “If you work backwards, then there is still material upside in the domestic bank names, it’s just it’s going to take you four years to get there rather than the five months in which you’ve had this phenomenal return from ‘going bust valuations’.”
“The easy part of the ride of the last six months is over. It’s going to be much more volatile in the coming six to nine months but there are lots of opportunities to make money.”