Earlier this week I had the uncomfortable feeling that, in the words of Yogi Bear, 'its like dÃ©jÃ ...
Earlier this week I had the uncomfortable feeling that, in the words of Yogi Bear, 'its like dÃ©jÃ vu all over again'.
In the sporting world, my beloved Burnley have once again started the new season with three straight defeats, England have crumbled to another spineless defeat at Headingley and there has been a dismal showing by GB athletes at the world championships.
Looking at the stock market, one could be forgiven for having much the same feeling. The market is up 30% in less than six months, technology stocks are once again in vogue and Tony Dye is back on the front page of the Sunday papers questioning the sanity of momentum investors.
The change in sentiment within the equity market over the past few months has certainly been dramatic, but in reality it would be a gross exaggeration to imply we are back to anything like the 'bubble' levels of late 1999, early 2000. A more realistic assessment would be that the market has bounced back from the oversold levels seen ahead of the Iraq conflict and is now trading close to fair value.
From a top-down perspective a 2003 earnings multiple of 13 times coupled with a dividend yield of 3.3% does not appear unreasonable given the current level of gilt yields.
After such a strong move, however, there will almost inevitably be pockets of the market where valuations appear stretched and this is certainly the case now.
Stocks trading on 20, 30 or even 40 times earnings are increasingly evident as fund managers chase beta and this must be a source of concern.
It would appear that fear of underperforming a rising market has replaced fear of losing money in absolute terms as the dominant emotion in the market.
To some degree, I hope the optimism implied by such valuations proves well-placed and that we do see a strong cyclical rebound in profitability, but the risk/reward trade-off implies we have moved from the investment world to the realms of speculation.
Our central view is that a modest global economic recovery is now under way and that growth in the UK will accelerate in 2004.
We continue to believe, however, that after several years living beyond their means, UK consumers must eventually moderate their behaviour. The trigger for this will either be a rise in interest rates as the recovery gathers momentum or further fiscal tightening as the Chancellor struggles to limit the burgeoning deficit. Ideally, business investment will rebound to help compensate for this slowdown but this is by no means certain.
Under this scenario, the trading environment for most companies will remain subdued, with pricing power still elusive and some of the more extravagant earnings forecasts are unlikely to be met.
As a fund manager with a mandate to focus on absolute, rather than relative, returns it is the neglected areas of the market that are often the most interesting. Therefore, at present, I am drawn back to sectors such as tobacco, food and utilities. Many stocks in these areas have actually fallen in value over the past three months and appear materially undervalued.
Patience may well be required before this upside is realised, but in the meantime investors will be rewarded with attractive yields.
Global recovery under way.
Sentiment improved dramatically.
Pockets of value remain.
Partner Insight: Dennis Hall, director and CEO of Yellowtail Financial Planning, Julia Dreblow, founder of SRI Financial Services and Frank Potaczek, head of UK proposition at Architas met in London to discuss different types of investor attitudes towards...
MSCI and Hermes research
Benefit calculators, tools and guides
‘In the know’
Answers by 3 December