UK market offers value but further set-backs are possible and growth forecasts are too high
The UK market now represents fair value but consensus earnings forecasts for next year are too optimistic and further set- backs are possible when reality bites, according to Graham Campbell, head of retail funds at Scottish Widows Investment Partnership.
However, select bargains are to be found for investors hunting hard enough as there are still large disparities between the valuations of individual companies, Campbell said. It is a point with which Edward Bonham Carter, joint chief executive of Jupiter Unit Trust Managers, agrees.
Overall, the UK stock market is somewhat attractive in valuation terms and has strong growth prospects, Campbell said. However, the risk is that investors have become too optimistic on earnings, with some analysts forecasting a pick up in earnings growth of up to 30% this year.
Campbell is concerned these optimistic expectations will not be met and so is not looking to a pick up in earnings to drive valuations forward.
Factors that are working in favour of the market, meanwhile, are that interest rates in the UK could fall further and confidence will slowly return. This is against a background of companies that are trading well below their intrinsic value.
Within his UK equity portfolio, Campbell has moved to a more growth-oriented stance, based on individual opportunities.
'About one year ago, the portfolio was much more defensive in nature' he said. 'We were focusing on companies with relatively secure earnings and had holdings in sectors such as food and utilities ' Unilever and Scottish Power, for example.
'We didn't necessarily hold these because we saw them as defensive but because they were cheap at the time. The stocks have since performed well so are now less attractive. Therefore, in our more aggressive funds, we have been reducing exposure to these sectors and have been building up on companies that will benefit more from growth in the longer term.'
Although he is not certain he has bought these stocks at the bottom of the market, Campbell said he is able to buy attractive companies at reasonable prices, which means he will have exposure when a turnaround in the market does eventuate.
Examples of companies recently purchased or added to include Premier Farnell, Close Brothers, Rathbones, Bunzl, BSkyB and Granada.
Bonham Carter, said current market levels and continued uncertainty about their future direction should not put investors off topping up their equity portfolios.
He added: 'It is as good a time as any to look at new or top-up investments. Timing is often counter-intuitive ' people should get more nervous when prices are going up, like the housing market, and should get more excited about opportunities when prices are coming down.
'Right now, people are very nervous, perhaps thinking about selling their shares, when prices have come down 40%, in some cases more than 50%. That's the paradox: they are cut price.
'I can share some of the feelings of these hesitant investors because my colleagues at Jupiter and I have invested in our own and other Jupiter funds and felt the impact of the markets. However, this should not prevent further investment.'
Bonham Carter said current market opportunities are promising but warned markets may not bounce in the short or medium term. He stressed the enormous rises of the early 80s are simply not sustainable.
'Overall investment returns looking forward will be lower than investors may have become used to,' he said.
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