signs of tightening of discounts to nav in most sectors but a short-term reversal is possible
The upturn in markets has brought discounts in the investment trust sector to their lowest level since August 2002.
Paul Locke, analyst at HSBC, said this narrowing trend, judged on a market cap weighted average basis, has not been limited to a few specific trusts or sectors. Furthermore, as of 10 June only two sectors, Europe and UK Small Cap, stand on a discount wider than that of their 12-month average.
To Locke this suggests that, at least temporarily, some of the risk aversion has given way to a more rounded view of pricing in the sector. 'With the world's economic fundamentals still certainly subject to intense scrutiny, disappointment at the earnings level as well as shocks associated with corporate mis-management, still leave underlying markets subject to both volatility and reversal,' he said.
While he believes an average sector-wide discount of 10.5% is not unsustainable, Locke cautioned that recent trends, together with still prevalent risks, suggested that at least some short-term reversal remains probable.
He said: 'While discounts as a whole may have narrowed, specific fundamentals have, to a degree, been ignored in the rush. We should therefore expect not only some short-term de-rating to take place at the wider sector level, but for investors to take a closer look at specific pricing within sectors. The sector as a whole may appear expensive, but significant opportunities still exist.'
The peer group which has witnessed one of the most impressive re-ratings in the last month is Biotech and Pharmaceuticals, where a strong rebound in NAV performance has resulted in a halving of discounts from over 20% to just 10%.
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