The recent flare-up in coronavirus cases in the UK and its potential to force the country into another economic lockdown is not what is giving Jupiter’s Richard Buxton the greatest cause for concern, with the manager instead saying he is more worried about the implications of “the end of monetary policy”.
One of the most over-used phrases related to the coronavirus outbreak is that of ‘living in unprecedented times’.
Yet Buxton (pictured), who is head of strategy – UK alpha at Jupiter and runs the Merian UK Alpha fund, pointed out we were living in unprecedented times before the pandemic hit.
“Look back with the benefit of hindsight to that fourth quarter of 2018 when the Fed was continuing to crank interest rates up and the chairman terrified us all by saying ‘we may not even be neutral yet, we don't know where neutral is’,” he said.
“Markets rioted and induced the huge pivot to start cutting interest rates. Policy was already too tight and in effect that has brought an end to 40 years of the orthodoxy of governments trying to run modest deficits and the central banks controlling the economic cycles through interest-rate policy.
“Monetary policy is now done. It has no further role. Central banks will continue to regulate their asset purchases, but it won't be through interest rates anymore.
“Even if we were to get some inflation or get economies overheating, it will probably be fiscal policies that will be the sole driver: that would be raising taxes to cool the economy rather than raising interest rates. So, we are in unprecedented territory.”
Buxton said the implications for markets will play out over a multi-decade period, which he contrasted with the short-term impact of the coronavirus – where “there are enough people working on enough things” such as testing systems and vaccines to give him the confidence to look beyond the pandemic.
With travel companies, for example, he said it is possible to produce models that assume much lower revenues over the next few years, with a full recovery delayed until 2024 – yet even under these pessimistic scenarios, there are a number of stocks whose share prices could double.
Performance of sector in 2020
Source: FE Analytics
“But it is the implications of zero interest rates with no incentive for saving against consumption, a very distorted set of financial markets and then the growth/value debate [that worries me],” he continued.
“Growth has been outperforming value for most of the time since the financial crisis and it has just got even more extreme.
“But I still personally believe that the starting price you pay for an asset has some relevance to the future return. I think that's the dilemma.”
Banking has been one of the sectors that has suffered the most in this new environment. But aside from the difficulty banks have generating a profit in an environment of near-zero interest rates and flat yield curves, Buxton also expressed concern about the way the government is standing behind emergency loans – describing it as “the beginning of a slippery slope of semi-nationalisation” where the banks become an outer branch of the Treasury.
Yet this has not been enough to turn him off the sector entirely.
Performance of sector in 2020
Source: FE Analytics
“We know that they've got headwinds from the level of interest rates and bond yields. We know that they've got headwinds from provisioning ahead of the downturn, and we are anticipating the rise of unemployment.
“And yet these stocks are trading at massive discounts to book value and I do not think that the entirety of that discount is going to be eroded through bad debts. I think we will emerge from this into a world where they can continue to be, regulator-permitting, very strong dividend payers.”
There is one potential consequence of fiscal stimulus measures that Buxton is not particularly concerned about, even if it is worrying some of his peers – inflation.
He pointed out that despite the enormous amounts of money that have been printed this year, the velocity in circulation has not increased – and we will not see a marked increase in prices until it does.
In any case, he said an uptick in inflation would not be the worst outcome for governments and central banks, considering their enormous debt piles – but he struggled to envisage how this could occur.
“We just live in a world of abundance,” he explained. “We've got excess labour, excess capital and excess commodities, because technological progress is reducing the cost of finding things.
“The price of solar has absolutely collapsed to levels where OPEC is producing less now than it has for about 30 years and it's still struggling to keep the oil price at around $40 a barrel.
“It's very difficult to see an early pickup in inflation for me when you haven't got some of those key inputs like energy rising substantially.
“It may well be that with this shift from monetary to fiscal policy, it's absolutely where we end up. But I may have retired by the time it comes back.”
Data from FE Analytics shows Merian UK Alpha has made 70.28 per cent over the past decade, compared with gains of 76.87 per cent from its IA UK All Companies sector and 68.98 per cent from the FTSE All Share.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The £881m fund has ongoing charges of 0.85 per cent.