While domestic valuations are hovering at a historically highs in a period of election uncertainty, one thing that a large part of the investor community is positive on is the scope for earnings clawing back ground on shares prices.
However, Tillett, manager of the Allianz UK Unconstrained Fund, which utilises a stockpicking approach, believes this industry buoyancy is precariously balanced on a range of economic factors, and warned investors to be on their guard against potential slip-ups.
He said: “Valuations in most areas of the market are a lot higher than they have been historically, which implies that there will be come earnings growth coming through.
“But people have become too optimistic about the recovery, and there are question marks around how sustainable it is. We have had good employment growth but we have not had good productivity growth, and that is what is needed to have a sustainable recovery.
“We have seen people put back into work, but a lot of it is in low-paid, unskilled jobs. We have not seen enough investment into the supply side of the economy to have a multi-year growth story. Also, the consumer is still quite indebted, and has been propped by low interest rates and mortgage costs – if those two factors were to change then we would have problems.”
Tillett highlighted UK-exposed companies in the small and mid-cap sectors – which account for around 40% of total UK earnings – as more susceptible to an economic slowdown than their FTSE 100 counterparts that draw earnings from overseas.
Furthermore, he believes that, as well as the negative impact posed by earnings failing to close the gap on valuations, there is also a likelihood of an adverse effect even if earnings do come through.
“The forecasts are too optimistic, and if earnings do not come through then it will not be taken well,” he explained. “However, there is also danger if earnings growth does happen.
“Shares may not necessarily go up, they could just de-rate instead. Even if companies deliver well fundamentally over the next few years and grow their earnings, it does not necessarily mean that investors will make money – they might just get their dividend while the shares do not go anywhere.”
