Demographics and debt will constrain growth in the UK market, according to Edward Bonham Carter, chi...
Demographics and debt will constrain growth in the UK market, according to Edward Bonham Carter, chief investment officer at Jupiter.
Bonham Carter says the UK is now in a world of low numbers, both nominal and real.
Looking ahead, he believes growth potential will be constrained by demographics and pricing power will be hampered by increased global competition.
He says debt creation has been growing inexorably and at some point in this low inflationary environment, it will have to be repaid, which will put a brake on growth.
On a more positive note, Bonham Carter points out some 40% of UK stocks have a free cashflow yield of more than 11%.
He says: 'If you think interest rates will stay low, this looks very attractive and indicates an increase in merger and acquisition activity. In a low-growth world, one way to grow is to merge, combine and take out your costs.'
Over the next three to five years, Bonham Carter expects annual investment growth of 5.7%. At some point, he says, the housing market will come off the boil.
Although valuations are reasonable in the UK, he feels they are not stunningly cheap, so he is not overly bullish on equities at present.
Like Bonham Carter, Humphrey van der Klugt, manager of the Schroder Income fund, believes excessive levels of debt will continue to suppress growth in demand in the UK and says the economic background is mixed at best. However, van der Klugt is more confident when it comes to the stock market itself.
'At current levels, I feel share prices are reflecting many of the prevailing global economic and political uncertainties,' he says. 'In certain circumstances, they are pricing in an even worse scenario than is currently panning out. This is offering specific long-term opportunities to invest in companies with reasonable valuations and attractive yields.'
Van der Klugt notes the FTSE All-Share's current yield of around 3.9% is not far short of the yield on 10-year gilts and is similar to what can be achieved in a bank or building society.
He says although the availability of dependable yields is a good thing, a high yield is not a sufficient reason to invest.
'Over the course of the past year, we have been shifting the emphasis of the fund's portfolio from so-called deep-value stocks that simply have an above-average yield to those offering the prospect of rising dividends over the long term,' he says.
The dividend cover on the FTSE All-Share is around 1.5 times, according to van der Klugt, which, although not strong, is not worryingly low either. Most encouragingly, he says, the profit motive for companies is alive and well. Companies are cutting costs effectively, as evident in the deceleration of the growth rate of unit labour costs, he notes
Firms are also being more disciplined about capital spending following the excesses of the tech boom, he says, which is helping cashflow.
Such measures to protect profits and cashflow should also protect dividend payments, van der Klugt adds.
40% of UK stocks yield more than 11 % cash.
Dividends are looking reasonable.
Companies are cutting costs.
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