The previous year has been a difficult one for UK equities with a largely flat market that was also marked by significant periods of weakness. The performing part of the market was mid-caps while large cap stocks were the weakest.
Performance of indices in 2014
Source: FE Analytics
Barnett, who manages a number of open-ended funds and investment trusts at Invesco Perpetual including the £6.7bn Invesco Perpetual Income and £12.6bn Invesco Perpetual High Income funds, believes the global economy will feel ongoing woes throughout the 2015 with the UK likely to feel the pressure.
“The UK equity market is, I believe, likely to become more volatile. The key issues which continue to overshadow the performance of the equity market remain the interplay between growing investor pessimism on the global economic outlook and the ability of policymakers to create the conditions to reinvigorate growth prospects where necessary,” he said.
“The recent performance of the eurozone and Chinese economies in particular is concerning.”
“Weaker than expected growth in these areas, and the deflationary forces which are exported, will undoubtedly have an impact on other developed economies such as the US and the UK, which performed relatively well in 2014.”
“In my view, the overall background for revenue growth is likely to remain challenging in 2015.”
“The speed and severity of the decline in the oil price neatly encapsulates both sides of the economic debate.”
The plummet in the price of oil – shown in the below graph – took the market by surprise in the second half of last year, posing a clear risk to the popular oil major stocks as well as oil producers such as Russia and Nigeria.
Performance of index in 2014
Source: FE Analytics
However, Barnett notes there may be some upside for the global economy as the oil price stays low, especially if most of the year sees a continuation of historically low interest rates in the US and UK.
“On the positive side, it is certainly a boost to consumption in the developed world. However, it is clearly a deflationary force and represents a reminder of the underlying weakening demand in the Chinese economy.”
“The speed of the recent decline - and how companies respond to this new volatility - represents an additional contributor to stock market volatility,” the manager said.
“Given the recent economic news, it is likely that the anticipated increase in rates in the US and UK will be deferred until mid-2015, as there is very little sign of inflationary pressure in these economies, despite rapidly falling levels of unemployment.”
However, Barnett joins the ranks of some of the UK’s top managers such as old stablemate and fellow FE Alpha Manager Neil Woodford in his concern about the effect of the general election on market sentiment.
He notes that events such as the Scottish independence referendum hung over markets last year, particularly as they came to fruition, and says this is only likely to continue as voters head to the polls in an election which most commentators agree is too close to call.
“The political backdrop both domestically and internationally is another issue which has taken on more relevance in the recent past, but which, I believe, is likely to remain an important influence for the next 12 months,” he said.
“The changes in the political agenda ahead of the UK general election in May 2015 are likely to be another source of uncertainty for the UK stock market.”
“Moments of market weakness in recent weeks are symptomatic of some of these concerns. It can be argued that equities continue to look attractive relative to other asset classes, but in some cases absolute valuations still look elevated where share prices do not appropriately anticipate the risk to earnings and cash flows.”
Both Invesco Perpetual Income and Invesco Perpetual High Income outperformed last year despite jitters in the broad market and the relative underperformance of the two funds’ favoured large and mega caps.
Technically, Barnett wasn’t heading up the funds for the whole of the past year, named as manager only from the date of former manager Woodford’s departure at the beginning of March.
Performance of funds, sector and index over 1yr
Source: FE Analytics
But despite the macro worries Barnett says he will not change his portfolio of fund’s strategy materially.
“A high price is placed on the companies in the market which offer visibility of revenues, profits and cash flows in this low growth world and which are managed for the principal purpose of delivering shareholder value in the form of a sustainable and growing dividend.”