Tepes (pictured) says that the narrowing of discounts on investment trusts is alarming, particularly in certain sectors with little prospects of growth. Economic and corporate data suggests there is little upside to equities in the medium-term, the analyst warns.
She points to the large premium on F&C Commercial Property Trust as particularly worrying.
AIC data shows the trust is sitting on a 23.3 per cent premium, with a 5 per cent yield. Given that IPD data suggests capital values in property will remain flat in the near future and income will grow by only 7 per cent, investors are effectively giving up four years of yield for nothing, Tepes says.
Price and NAV of F&C Commercial Property over 1yr
Source: FE Analytics
UK Commercial Property is on a 13.03 per cent premium and Standard Life Property Income Trust on a 14.13 per cent premium and the other closed-ended funds in the sector are also on premiums.
The situation is akin to the run-up to the 2007 crisis in the market, the analyst warns.
F&C Commercial Property is an extreme example of what has been happening to the wider investment trust universe over the past year: discounts have been narrowing and analysts have been warning that there is little value left.
Last week Oriel Securities’ Iain Scouller warned investors that small and mid caps now looked over-bought and investors should be looking to take profits.
He said there was no obvious candidate for a sector in which to re-invest, however.
Tepes says that in the UK equity market, investors are making very generous assumptions about future earnings growth that is unlikely to materialise.
"The FTSE is on 20 times historic earnings but 13 times future earnings," she said. "If that earnings growth doesn’t come through, people are going to be disappointed."
"You have to have sales growth now. No more cost-cutting can be done. Financing costs, interest rates are so low and not going to get much lower, so unless there is growth in sales you won’t get good earnings growth."
FE Alpha Manager Leigh Himsworth also says that ratings are starting to look highly sensitive to earnings growth.
"Though equity markets continue to offer value, it is essential now for companies to post positive statements, given that ratings are beginning to leave little room for disappointment," he said.
However, Tepes says that the prospects of sales growth are low because little has been done about the huge levels of personal and public debt in the country.
"The country is still indebted: ultimately, unless you get wage growth, you can’t see spending power improve," she said.
The analyst says that while some industry commentators hope corporates can put their cash piles to work and stimulate the economy, this will fall foul of the same problem.
"People are putting their hopes in corporate capex [capital expenditure]. If companies invest in capex, we might see things improving, but it comes back to the fact that governments are indebted and consumers are indebted and those are the two sources of consumption," she said.
The analyst’s warning agrees with a bearish report from the Bank for International Settlements published over the weekend, which said that the growth in appetite for debt was reminiscent of the exuberance that led to the 2007 credit crunch.
Investors are buying riskier forms of debt while little has been done to reduce the debt piles built up pre credit-crisis, the report warns.
Himsworth (pictured) suggests an increase in M&A activity could give market sentiment the boost it needs. However, Tepes says that even an increase in M&A could be seen negatively, and that is how she reads statements from private equity investors about the environment improving for divestments.
"Normally mergers and acquisitions happen at the top of the market," she warned.
In fact, she says that the failure of M&A activity to keep up with forecasts made earlier in the year is a sign that the market could have to wait a bit longer for the recovery.
The other positive is that many investors still have large amounts in cash, meaning there is potential stimulus out there.
Tepes says that it is hard to find good figures for how much investors are holding in cash, but data from Fidelity records that HNW individuals have on average 20 per cent in the asset class.
However, ultimately the future for the market boils down to whether companies are able to increase their sales, and Tepes says there is little chance of that in the medium-term.
The analyst says she favours hedge funds such as BlueCrest Allblue and Brevan Howard at the moment, and defensive trusts such as Personal Assets Trust.
Performance of funds over 1yr
Source: FE Analytics
Sebastian Lyon, manager of the Personal Assets Trust, warned FE Trustnet readers over the summer that expensive valuations and the poor macro environment meant he expected a big market correction in the coming months.