The FE Alpha Manager adds that while Moody’s downgrade to the UK’s credit rating is of little significance in default terms, it suggests a long period of low growth for the economy. "With falling earnings expectations and rising share prices, the stock market is getting rapidly more expensive," he warned.
"This is not sustainable in the medium-term: either we need to see upgrades to numbers to justify the move we’re already having, or the stock market needs, at least, to pause for breath."
"The market is looking for 10 per cent earnings growth this year over last. We find it hard to see where that will come from. We are cautious because we think that the trend for downgrades is not over," Mott said.
Performance of index year-to-date
Source: FE Analytics
The equity income expert says that debt is still too high and the economy is too unbalanced for there to be a turnaround in fortunes any time soon.
He adds that the overall economic picture remains "muddled", with problems in Europe continuing to form dark clouds on the horizon.
"There are some brighter spots, such as US housing, but there are still many quagmires, like much of Europe," he said.
"The latest crisis in Cyprus shows how little the eurozone has really been fixed."
"We simply cannot see how the world can embark on a period of sustained growth that would be sufficient to make the current consensus of 10 per cent earnings growth obtainable."
The problem of inflation
As Mott explains, the UK will never be at risk of default because the Bank of England will continue with fiscal measures such as printing more money and keeping interest rates artificially low in order to avoid an all-out collapse – thus rendering credit downgrades relatively obsolete.
However, he warns sterling has already taken a hit following the downgrade and that its continued devaluation will present problems further down the road.
"At some point, market participants will realise that inflation is the price we must pay for extraordinarily loose monetary policies," he said.
"When precisely that recognition occurs is hard to say exactly, but we have been gradually putting in place steps to protect the Psigma Income fund from the effects of inflation."
He says inflation will not go through the roof, rather it will stay uncomfortably high for a protracted period, further dampening growth in the domestic economy.
"Rather we believe that inflation will be stubborn and persistent at the 3 to 5 per cent level and this is not consistent with current pricing in the fixed income markets," he said.
Psigma Income
Mott says in order to protect the Income portfolio from the threat of inflation, he and co-managers Neil Cumming and Eric Moore are focusing on large multinational corporations that sell everyday essentials and retain a degree of pricing power.
This approach lends itself to blue chip income-paying stocks such as GlaxoSmithKline, AstraZeneca, Swiss pharmaceutical giants Novartis and Roche, and Vodafone.
While Mott says he has sold down some of the fund's tobacco exposure, the traditionally defensive sector is still one of its main overweight positions.
The fund also has exposure to food producers Unilever and Nestle.
Mott has a high conviction in the out-of-favour commodities sector, expecting it to buoy returns should inflation expectations become "unanchored".
"We think that having nearly a quarter of the fund in resources companies, especially oil and gas, should provide us with good returns," he said.
"With a growing and increasingly affluent global population, we think that the demand for commodities will remain robust."
Mott says the team is coupling its view on resources and consumer staples with companies that enjoy a degree of inflation-proofing.
However, he says he is avoiding holding physical commercial property, which has traditionally presented a good hedge against inflation.
"We think the attractions of owning bricks-and-mortar assets are more than offset by rising voids – especially in retail – and valuation yields that already look quite skinny," he said.
The £386.5m Psigma Income fund has lagged the IMA UK Equity Income sector over one, three and five years.
It has also underperformed the FTSE All Share over one and five years, but has slightly outperformed it over three.
Over the last five years, the fund has made 33.32 per cent while the sector and index have gained 41.44 per cent and 43.8 per cent, respectively.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
It is currently yielding 3.89 per cent.
The fund requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.69 per cent.