Colin Morton says Valuations are now attractive having dropped below those of small caps
Large-cap stocks are attractive, with valuations having fallen below those of small-cap stocks for the first time in years, according to Colin Morton, manager of the BWD UK Equity Income trust and the BWD UK Blue Chip Growth.
The market is good value, not in relative terms but in absolute terms, he said. Heading into the last week of July, the rating for large-cap stocks fell below that of mid caps. Within days it had rebounded, providing a 10% uplift in investments in the large-cap area of the market, while mid and small-caps remained quite flat, Morton said.
In addition, the yields available in the asset class have been attractive in their own right, even though some capital values have been falling. The BWD Equity Income fund is yielding around 4.2%, above cash and is almost on par with bond investments, he noted.
'At 4.2% to start, you don't need any capital gain and, when the turnaround comes, large caps will be the first to see any rise,' said Morton.
While he is not calling the bottom of the market and is not predicting the direction will be upwards from here, he believes now is a good time to pick up on some great companies.
He said: 'No one can call the bottom so why pretend you can? All you can say is that it is good value now, although it may take more than that to turn it around. It may have to get extremely cheap before it responds just as it once got very stretched before coming down. 'But when you get to a point where equities are yielding above cash, I believe that's a nice entry point to get into the market.'
The current volatility of the market is uncomfortable, Morton said, but he falls short of blaming hedge funds for the added movements in the market.
'No one was blaming them two years ago on the way up,' he pointed out. 'Two years ago, they were probably extending the market, being long the momentum stocks. Now people are complaining because we can only see the negative side. 'They may be creating extra short-term volatility but, over a reasonable time scale, probably not. All they are doing is making what would happen anyway happen quicker.'
The increase in accountancy scandals is also something Morton shrugs off, believing that they are few when compared to how many listed companies there are in the US.
He said this is also a by-product of the overuse of share options as incentives among US employers, creating an environment conducive towards boosting the profits of a company, even artificially.
However, he believes the market is overreacting to these scandals, allowing it to go too far, especially as economic news out of the US has been very positive of late.
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