Edinburgh Managed Growth fund manager Harry Morgan believes that UK stock market valuations are now ...
Edinburgh Managed Growth fund manager Harry Morgan believes that UK stock market valuations are now starting to look cheap relative to profits growth.
Over the past 30 years, when long-term UK company profits have risen, so have stock markets. But, he argues, this is no longer true.
'If you look at the gross trading profits of UK companies over recent months, then profits have kept on rising but stock markets have fallen. We see this as being quite encouraging and believe that some sectors are now offering good value,' he says.
Technology is not one of these sectors, according to Morgan. Globally, technology and telecom stocks still look expensive. A surprising number of companies in this sector still have high P/E ratios and, in some cases, are only just below their peak ratings in February 2000, he says.
The plummeting valuations of tech stocks, which has led to many companies falling out of the mid-cap market and into smaller-cap indices, will ensure the continued poor performance of small caps, says Morgan.
'We think value cyclicals are potentially the next story,' he says. 'By this we mean old economy stocks in industries such as housing and engineering ' the likes of GKN and Rolls Royce with low P/Es but solid businesses. Media companies may also start to look attractive. However, for the moment, we're not selling out of defensives because we're still getting a good yield from them.'
The big issue here is one of timing, Morgan says. He feels the market will not start to turn in the US for another couple of months but is confident that it will happen.
Rothschilds Asset Management's director of portfolio services, Bambos Hambi, is also relatively optimistic about the global economic outlook.
'We've moved some cash into North America,' he says. 'Although we're still overweight UK equities because of their defensive qualities, we've now taken up a neutral stance on bonds, equities and cash.'
He feels more confident about a US recovery than a possible upturn in Europe and thinks the ECB's slowness in reacting to poor economic data in the US has reduced the chances of this occurring early next year.
'I think analysts have been very optimistic with their earnings predictions for European companies next year. We're currently underweight Europe and Japan,' says Hambi.
The Japanese bigger picture is still a worry, he says, as Koizumi's reform package will hurt the economy in the short term. What we need to see, he says, is how committed the public are to reforms and whether the political will to push them through exists.
Hambi believes it is still possible to find value even with the Japanese economy in recession. He points to the cheap valuations of a number of large companies that have started to restructure as evidence of this.
He is very positive on American small caps at the moment and heavily invested in mid caps across all regions except the Far East.
• Market valuations starting to look cheap.
• US small caps are outperforming.
• Value cyclicals look promising.
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