Yields on stocks outside the technology sector are set to continue to rise following a year in which...
Yields on stocks outside the technology sector are set to continue to rise following a year in which dividend streams of around 6% were available, according to Neil Woodford, fund manager at Perpetual.
He says: "Last year we did not like the bubble stocks and became attracted to other stocks that were falling in price. It was possible to buy some very attractive companies on low P/E's and high yields."
Woodford has positioned his fund accordingly. He says: "The stocks performed well in 2000 and still have further to go.
"The year 2000 offered abundant yields in attractive markets. The prospective yield on the High Income fund is 3.5% or more and just over 3% on the Income fund."
Woodford favours utilities and economically sensitive areas of the market such as manufacturing. He is keen on construction, chemical, mining, aerospace and defence engineering and other capital goods stocks. He also recognises the yield opportunity in consumer areas of retail and tobacco.
He says: "Even the food retailer Safeway has been offering a yield of 6%."
According to Woodford, the market has further to go in an environment where the excesses earlier in 2000 have dissipated somewhat. He believes that as the US economy slows, the IT explosion will come to an end. He adds a number of developments could undermine the belief that technology is the only area in which to invest.
Woodford believes there is still an environment of earnings risk and multiple valuation compression in the highly rated sectors. He notes there are attractive technology stocks with long term growth characteristics, but feels many will not appeal relative to the value available in other areas of the market.
Bill Mott, fund manager of the Credit Suisse Income fund says: "The burst of the technology bubble has created an environment in which value investors can thrive.
"There are around 15 FTSE 100 stocks which need to fall by 50% before they reach a fair value. Counteracting this is the abundance of FTSE 250 stocks that could rise by as much as 50% without becoming expensive. For those willing to look outside the FTSE 100, there are considerable opportunities."
Mott agrees with Woodford, believing there is income opportunity in the building and contracting sector.
He says: "Many companies are selling on five year relative lows. With less volatility in interest rates and a less pronounced economic cycle, the quality of earnings is improving.
"Large government surpluses across the UK and the US will underpin the profits of many building related companies. It is still possible to buy good quality building companies on big discount ratings to the market and significant yield premiums."
Mott recommends the engineering and food-manufacturing sectors as he believes a number of quality companies are selling on depressed ratings due to the strength of the sterling.
He says: "The market has not yet fully appreciated the available yields nor the predictability of their earnings."
Went into administration April 2018
Threat of legal action looms over Woodford IM
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