By Alex Crooke
Alex Crooke, Head of Global Equity Income, discusses current equity market valuations, provides his outlook for inflation and explains why Japan is becoming an attractive market for equity income investors.
So inflation two or three years, two years ago, was roughly zero in many markets of Europe and America and the UK, and it is now trending sort of 1½ to 2%. So we have seen a little more inflation. Now I think the key drivers of inflation, we look back into previous periods of inflation, bank lending and wage growth... so those are the two components that tend to drive higher levels of inflation historically. Now bank lending is really under very strict control, banks are still trying to increase their capital, and that is not out of control. But I think in terms of wage growth, this is why it hasn't come through... wage growth is still very muted, but I still feel there are the conditions to probably see higher levels of wage growth in the future, i.e., very low levels of unemployment, so employers are going to have to start paying out higher wages, in my opinion, to get good, quality staff. So, I still believe the periods of inflation maybe at 2-3% is still likely in Western and developed U.S. and European markets.
I think what we are very interested in again, if you take a more medium-term look at the last 10 years or so, we see particularly a preponderance of new regulation coming out in Japanese companies, particularly driving independence of boards... so directors that are running companies increasing independence, or a majority of independent directors, not employees of the company or other incomers that are invested in that company. So that, in essence, is what we are seeing is driving, I think, better decisions or more independent decisions in terms of capital employed in the business investment spending and rewards, in a sense, to shareholders in terms of dividends coming through. And so all that is leading, I think, to another market where we are seeing very good dividend growth coming from our investments.
I think we are into sort of fair to sometimes expensive valuations, but more like fair valuations in many markets. They are certainly not cheap. But when we look at Europe, sentiment is very low, particularly in that market. We are seeing strong earnings growth coming through, but off of a very low base... it's still a sort of an echo, I suppose, of the financial crisis in terms of corporate earnings being from a low level, so there is potential for pick-up there, which might make valuations actually look quite attractive. In America, yes, they are expensive, certainly in some sectors like the technology area, but actually again, growth is coming through very strongly there for certain names in that sector. So I still feel markets are fairly priced and, therefore, you know, relative to credit markets and fixed interest, the returns that they should generate should be quite attractive.
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