Investors can be broadly bullish on equities, according to David Jane, manager of Miton’s multi-asset fund range, who says there is a real case to be put forward that a further bull run for equities is on the cards. 
“I have seen quite a few [bull markets] in my career and they have an early phase, which is driven by recovery after a sell off, a middle phase, which is fairly dull, and they have a latter phase when things go pretty fun – and I would suggest we are about to enter that latter phase,” Jane (pictured) said.
Many have preached uncertainty for global equities, with the upcoming presidential election in the US, the fallout from Brexit in the UK and Europe, and the potential for a slowdown in China, all causing nervousness for investors.
Nevertheless, equity markets have delivered significant gains with the MSCI AC World delivering a hefty 18.34 per cent return in sterling terms since the start of the year and 15 per cent gain since the Brexit vote – despite the uncertainty.
Performance of index in 2016
Source: FE Analytics
However, Jane suggests that a further rally in equities is on the cards, with a number of factors in place to aid a recovery in some of the un-loved parts of the market.
He says that for a long time, Miton has suggested that three things would remain: low interest rates, low growth and low inflation.
Since the financial crisis of 2008, interest rates have remained low globally, highlighted by the Bank of England’s decision to reduce rates to historical lows of 0.25 basis points and the unwillingness of the Federal Reserve to raise interest further than to 0.5 basis points, which they achieved towards the end of 2015.
Meanwhile, economic growth has remained relatively low. Jane says this is “partly driven by demographics, partly driven by the debt overhang and partly driven by demand defection,” and as a consequence inflation has also remained low.
“And that thesis broadly holds today except for the middle point,” Jane said.
“Everything’s been driven by monetary policy – keep rates low, buy assets that keeps inflation very low” he said.
“Now there’s one aspect of that that has come under great challenge and that is ultimately if we’re moving more toward fiscal expenditure - government spending more money particularly on infrastructure - growth could well accelerate whilst inflation and interest rates remain very low.”
“If that is the case you get very low cost of capital, growing top lines at corporates, growing bottom lines and profitability - so earnings and dividends are growing - while bond yields remain extremely low. You can see that that’s an extremely bullish environment for equities.”
Indeed, Jane says bond market yields are unlikely to rise in the near term, providing another boost to equities.
“Meanwhile in the bond market it doesn’t seem that monetary policy is about to tighten to any great degree so any fear of a steepening on the yield curve is a bit irrational,” he said.
As well as this, he says that the recent bullish run experienced since the financial crisis has been somewhat narrow, driven by so-called bond proxies, which have grown their profit margins rather than top line growth.
Additionally this period has been driven by companies buying back shares enhancing the value of the remaining shares and exchanging this for debt with very low borrowing costs, he said.
Elsewhere, the environment has been difficult, but Jane says this could be about to change.
“If you then remove the barriers and the negatives that overhang the rest of the equity market – which is ultimately a lack of top line growth – and start to see some growth in the industrial cyclicals infrastructure and consumer cyclicals at the top line - I can paint you a very bullish picture for equities,” Jane said.
The potential upcoming bull market “will be driven by top-line growth and profit growth, broadly across the whole economy as the fiscal constraint comes off and monetary easing remains,” Jane said.
An example of this, is in the small and medium sized companies, particularly in the UK and US, where they have broken out to new highs and are outperforming their larger peers.
Performance of indices over 6 months
Source: FE Analytics
This has been evidenced over the last six months, where US small caps have outperformed their larger rivals by 9.11 percentage points. In the UK it is slightly different story as small caps, which were hit especially hard following the EU referendum, but have received a recent boost due to the better than expected services PMI data.
“Small and medium sized companies are better indicators of the state of the underlying equity market and economy than big caps – which are usually large companies with very little economic sensibility,” Jane said.
“It’s the small and mid-sized companies that are at the front of the economy doing things where the economy will have an immediate impact – and the fact UK small caps are making new highs 6 weeks after the Brexit shows the UK economy is in good shape .”
While the UK has – to some extent – its own drivers, Jane says that the direction of global equity markets is based on the US economy, with the emerging markets and Europe benefitting from the knock-on effect of a strong US dollar.
“I think it’s reasonable to say that generally the US is improving and generally you can say that the US is on an accelerating trend having been on a long period of slow growth. So that would make you broadly constructive on the dollar and US sensitive assets,” Jane said.
“Actually as a consequence of that you can probably be broadly constructive on EM where again they benefit from an improving US outlook.”
“Meanwhile, Europe is an economy that follows because it’s so export driven. So if you’re going to be positive on Europe it’s for the reasons you were positive on the US and emerging markets and they would benefit second hand.”
However, as the owner of the multi-asset fund, Jane admits he cannot put all his eggs in one basket.
“Obviously we’re a multi-asset fund and we can’t bet on black and we’re not about to bet on black – but there is an emerging bull case for equities.”
Despite this, his CF Miton Cautious Multi Asset fund, co-managed with Anthony Rayner, has 23.3 per cent allocation to UK equities, while the MI Miton Cautious Monthly Income fund has 20 per cent to UK equities and 10 per cent to US equities and his CF Miton Defensive Multi Asset fund has a 14.7 per cent weighting to UK equities.
Jane, who is the former head of equities at M&G, joined Miton in 2014 and his funds have all performed well over that time.
Performance of funds since Jane joined Miton
Source: FE Analytics
The CF Miton Defensive Multi Asset has beaten its sector (the IA Mixed Investment 0%-35%) by 3.05 percentage points while the CF Miton Cautious Multi Asset and MI Miton Cautious Monthly Income funds have outperformed the IA Mixed Investment 20%-60% sector by 7.15 and 8.24 percentage points respectively.
