Investors expecting the FTSE 100 to keep soaring should temper their expectations for growth this year, Invesco Perpetual's Mark Barnett has warned.
Barnett, who takes over Invesco Perpetual's Income and High Income funds in April when star manager Neil Woodford exits to start up his own business, said it would be a struggle for the UK equity market to continue its run higher at anything like the rate seen in 2013.
"It is unlikely the performance of the UK stock market over the past year will be repeated over the coming 12 months," he said.
Barnett said the unanswered question over the ability of the market to transition from one driven by quantitative easing to one driven by the strength of the underlying economy remained the major risk to valuations, especially after such a hefty re-rating of equities.
"The strong performance of global markets over the previous 12 months has been notably related to the significant increases in monetary stimulus and liquidity from the US and Japanese central banks," he said.
"While corporate profits have remained broadly unchanged, equities have been re-rated to a level which anticipates upgrades to earnings expectations for 2014 and beyond."
As a result he expects UK equity markets to "remain volatile" as they adjust to the withdrawal of extraordinary monetary stimulus in the US.
"The key to navigating the near-term is to remain highly vigilant about the strength of corporate performance, given the economic backdrop, and to remain selective given the increase in valuations in the market," he said.
"A good strategy would be to focus on investing in companies that have proven ability to grow revenues, profits and free cash flow, coupled with management teams that are fully cognisant of the need to deliver sustainable dividend growth."
Barnett himself has proved adept at selecting the right companies over the last five years and beyond, returning 100.5% since January 2009, versus the IMA UK Equity Income sector average of 88.2%.
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