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Edward Bonham Carter's outlook for the stock market.
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Edward Bonham Carter, Jupiter's Chief Executive, comments on recent events and the outlook for stock markets:
"Despite the euphoria surrounding Barack Obama's inauguration, the corporate and economic news flow during the year to date has been decidedly gloomy.
"As widely expected, the UK is now officially in recession, having suffered two consecutive quarters of negative growth. This sobering news, together with other poor data (particularly from the financial sector where banks are recording heavy losses, and a new round of UK government measures designed to encourage banks to lend has been announced) highlight how much the outlook has deteriorated in recent weeks. The proposals, coming little more than three months after the first package announced by the government, aim to restore confidence among the banks and kick-start lending to consumers and corporates. However, it is too early to say how effective they can be against a backdrop of declining business and consumer confidence, falling house prices, rising job losses and the expectation of significant increases in bad debts, even if interest rates are cut further.
"However, it is starting to feel like we are 'pushing on a string' ie: no matter what policy makers in the UK and elsewhere do - whether it is bailing out the banking system, announcing infrastructure packages or reducing interest rates to historic lows - the impact on economies seems limited.
A tougher year ahead
"So, where do we go from here? In my view there are two questions that we need answers to: how long will this downturn be and, what will happen to prices. My view is that 2009 will prove far tougher than 2008 for the global economy as recession kicks in. Disinflationary and deflationary forces will also be with us longer than many previously thought.
"The spare capacity created from falling demand will mean unemployment will rise more sharply than expected. We have grown used to manufacturing price deflation (the result of cheaper imports from Asia). However, we could soon be in the unfamiliar territory of service price deflation. Modern economies prefer inflation to deflation. Assuming that policy markers will not allow the destruction of deposits, the only course of action is to continue printing money - or to use the latest buzzword "quantitative easing" - to lessen the length of the downturn.
"Given these difficulties, a recession could potentially last well into 2010. There could well be a period of bouncing along the bottom before we begin to see an anaemic recovery. If one were to visualise such an outlook, it would resemble more of a 'ladle-like' recovery than the v-shaped recoveries we have seen in the past.
Schizophrenic markets
"Against such a backdrop, markets are likely to be schizophrenic this year, swinging between periods of pessimism and optimism. However, a lot of bad news is already priced in to shares. While indices may go lower, investors are, in my view, starting to be paid for taking the risk of investing in equities on a three to five year time horizon. With share prices likely to remain highly volatile in the short term, averaging in exposure to the markets by using regular savings schemes is particularly attractive for those investors who do not have a short term requirement for cash.
"The other significant question for investors is where they can get their income from. With interest rates in many countries at historic lows and likely to fall further, investors' income will have dropped to critical levels. To achieve higher incomes, investors will have to take more risk. Given that the credit crunch has exposed many complex, 'manufactured' products as flawed - with capital often being sacrificed in pursuit of income - investors are more likely to seek out traditional income products, such as corporate bond funds and equity income funds.
"Profit warnings will undoubtedly increase. Some companies will have to cut their dividends and the overall yield on the market will fall as some banks put their dividends on hold. But there are still plenty of large, well-managed companies that will be able to maintain their dividends even in a recession. Being able to buy their shares on high yields looks significantly more attractive than the returns investors can get elsewhere.
"At Jupiter, our approach remains to invest in high quality companies with solid balance sheets that have the ability to grow in a difficult environment. It is part of the skill of Jupiter stock-pickers to identify which companies are likely to do well for investors over the medium to long term and emerge from this crisis in stronger positions than they entered it."
NOTE
Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM) are both authorised and regulated by the Financial Services Authority and their registered address is 1 Grosvenor Place London SW1X 7JJ. They are both subsidiaries of Jupiter Investment Management Group Limited and the group is collectively known as "Jupiter". The above commentary represents the views of the Fund Manager at the time of preparation and may be subject to change and this is particularly likely during periods of rapidly changing market circumstances. Their views are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.
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