With interest rates at record lows and inflation still running above the 2 per cent Bank of England target, investors have been forced to take on more risk just to preserve their capital. Traditionally the bond markets have been the best way for investors to get a low-risk source of income.
However, with high-quality government bonds offering negative real returns, Chillingworth, chief investment officer at Rathbones, claims that equities are the only worthwhile choice.
"In the context of the sovereign debt market, yields of 1.42 per cent on 10-year UK Government bonds are not offering investors a great return," he said.
"Equities, on the other hand, offer an average yield of 3.9 per cent and dividend flow is positive. To me they are the only game in town."
While equities are understood by many to be a higher-risk investment, Chillingworth says that some volatility is preferable to a guaranteed negative return in the bond market.
Furthermore, valuations based on price-to-earnings calculations suggest that equity markets have rarely been cheaper.
"People will worry that earnings will soften over the coming months and we anticipate slow economic growth over the coming years but companies are still offering very good value," he explained.
"Many stocks are showing a lot of resilience and we anticipate that there will still be decent earnings growth."
"The US is a particularly interesting market. The earnings season has been a good deal better than people have anticipated."
According to data from FE Analytics, the UK Equity Income sector has returned 43.29 per cent over the last three years while Global Equity Income has returned 41.58 per cent.
Meanwhile, the Sterling Corporate Bond and Global Bond sectors have returned 34.24 per cent and 26.44 per cent respectively and have little room for yields to fall further.
Performance of sectors over 3-yrs
Source: FE Analytics
Pessimists will point to the significant risks posed to equity markets by a slowdown in China, the fiscal cliff in the US and a potential collapse of the eurozone.
Well-known investor Hugh Hendry has predicted a significant stock market crash within the next 10 years, Bank of England governor Mervyn King believes the global downturn hasn't reached its half-way point yet and FE Alpha Manager Martin Gray says that the outlook for growth is bleaker than most investors realise.
However, Chillingworth believes that such doomsday predictions are far-fetched.
"If you factor in a double-dip recession in the US, a slowdown in the developing world and a collapse of the euro, then you don’t want to be in equities, but that view is quite extreme," he explained.
"Policy makers will move towards a ‘muddle through’ scenario."
"Investors aren’t left with much choice. Alternatives such as property and infrastructure investments haven’t offered great returns."
Chillingworth, who co-manages the Rathbone Recovery fund, recommends investors don’t commit all their assets to the stock market but instead keep some cash in reserve.
"You’ve got to be selective in the companies you pick and with the tail risks out there it is worth keeping some firepower to take advantage of any dips," he finished.
While James Millard, chief investment officer at Skandia Investment Group, says that investors should look past recent volatility and take a long-term view, he thinks investors are better off holding rather than adding to their risk exposure.
"It takes a brave investor to dramatically increase their exposure to equities right now," he said.
"The recent weakness in global economic growth could undermine equities in the short-term and we are waiting for signs of an improvement in the global economy before taking a more substantial overweight position."