Some of the forecasts being made about the economy in the wake of the Covid-19 pandemic are too pessimistic, according to F&C investment trust manager Paul Niven, which could lead to some surprises for investors.
Niven (pictured), who has overseen the £4.6bn F&C Investment Trust since 2014, said some of the analyst expectations for economic and business data have erred too much on the side of caution recently.
“People have been way too bearish in terms of the economic data releases,” said Niven. 
The manager said the number of occasions where data beat economic consensus expectations recently had been ‘off the chart’, highlighting the US labour market as an example, which improved “more rapidly than people had assumed”.
The US is already experiencing a brisk recovery due to pent-up demand caused by the state-wide lockdowns, and income of households in the US has gone up “despite the fact that wage payments have declined because of transfer payments from the government,” Niven said.
“This is leading people to reassess 2020 numbers and have implications for forward-looking forecasts. That’s really important for the earnings outlook,” he explained.
Indeed, the fund manager said certain leading indicators tracking earnings suggest a sharp upturn of earnings into 2021
And while the earnings uptick won’t recoup all the lost ground caused by the coronavirus and lockdowns, he said investors can expect “substantial progress” and “reasonable growth”.
“I don’t think that is in analyst expectations yet,” he added. “Analysts are always too optimistic going into the next year’s earnings cycle, they always downgrade nearly 8 to 10 per cent.”
This time, however, he said the downgrading process will likely be a lot less severe and that there will consequently be some positive surprises to earnings in the next cycle.
Investors saw that to some extent in the latest US earnings reporting season, Niven noted.
Contrasting the current economic environment with the 2008 global financial crisis, Niven said “it took something like three-and-a-half years for the US to recover all that lost ground from an economic perspective, and Europe [took] seven years”.
Yet, Niven said the recovery will be much quicker this time around.
“The reason for that is we did not go into this downturn with very large financial imbalances, and this recession was caused by a policy choice to shut down the economy rather than an economic or financial event,” he explained.
Yet, while US equities may post strong earnings after their extremely strong rally following the March sell-off , many investors have been calling into question their toppy valuations.
Even accounting for the sharp correction in March, US equities have dominated returns of the global equity market over the last decade.
“It’s not just a year-to-date story,” said Niven, noting that much of that outperformance has been driven by superior earnings growth.
“There is a gap between the extent of the US outperformance and the extent of earnings outperformance – people are paying more for US equities relative to other markets and that gap is getting wider,” he explained. ’“The US has persistently had higher margins and they’ve grown to a better extent than elsewhere.”
Performance of US equities
Source: BMO GAM and Minack Advisors
Growth stocks have also had a greater run over the last decade than their value counterparts, and Niven expects this trend to continue in the years ahead.
“The reason you pay a premium for growth is because you expect superior cash flows over a period of time,” he said. “These are long duration stocks. Ultimately you are paying a premium for superior cash flow or earnings generation in the long run.”
He said part of the reason why the premium on growth and disruptive tech has pushed on in the last six-to-12 months has been a function of what’s happening in the bond markets.
“Breakeven inflation expectations implied from bond markets are telling you they expect about 1.8 per cent per annum inflation over the next decade,” he explained.
“I suspect for a very long period of time we are looking at financial repression leading to materially negative real yields. We have that now, and I suspect we might see real yields push further into negative territory.”
He continued: “What that means is, all else being equal, if one buys the notion there will be some form of economic and earnings recovery, you pay more for long duration growth and you pay more for equities.
“Markets are expensive globally across all asset categories, growth prices have pushed higher, and I think part of that is a function of what is going on in bond markets and policy.”
And Niven said there’s a bit further to go on this trend.
Many investors have made comparisons to today’s equity market to that of the late-90s dotcom bubble and bust, but Niven believes “we’re not at that point yet”.
“We can debate how great these disruptive tech leaders such as Amazon, Apple, Microsoft, but there is ultimately a price worth paying for any stock,” said the F&C manager.
“I suspect that we are more likely to see these stocks push on and growth to continue to lead – notwithstanding the pullback we saw in recent days – because of the secular tailwinds, because of policy, and because I think we haven’t reached the point of real excess where valuations will be the binding constraint for progress.”
F&C Investment Trust’ has returned 80.62 per cent over the last five years compared to 83.69 per cent from the average peer in the IT Global sector and 91.63 per cent from the FTSE All World benchmark.
Performance of trust vs sector & benchmark over 5yrs
Source: FE Analytics
The trust is currently trading at a 9.7 per cent discount to net asset value (NAV) is 9 per cent geared and has ongoing charges of 0.54 per cent.