By Jonathan Groom, a fund manager at Rothschild Asset Management It has been a long, hot summer ...
By Jonathan Groom, a fund manager at Rothschild Asset Management
It has been a long, hot summer for global equities. Markets around the world have fallen back in the face of worries the US economy could be teetering on the brink of recession, a raft of profit warnings across the major markets and the possibility of war with Iraq.
Although, for the moment, the worst of the economic worries appear to be confined to the other side of the Atlantic, as well as the other side of the Channel, the UK market continues to trade in thrall to Wall Street.
We view the performance of the UK market as anomalous and believe recent market falls have left UK equities looking attractive both in global and absolute terms. The numbers are compelling, with yields equivalent to bonds (4.5%) commonplace and the overall market P/E falling below 12 times.
Despite the valuation argument, the market is unlikely to sustain an upward move until investors have a greater degree of confidence in the corporate earnings outlook.
Risk appetite is at an extraordinarily low level and this is reflected not just in the move away from equities towards bonds but also in the type of stocks investors wish to hold.
Despite investors' love affair with defensive sectors continuing more or less unabated for well over two years, it shows no signs of coming to an end soon. Nonetheless, there have been signs some areas of the market that tend to be viewed as defensive may be set to lose their allure.
The past few months have seen various earnings downgrades spread across a wide range of market sectors, encompassing areas that have hitherto been considered relative safe-havens. Food retail and tobacco stocks spring to mind here.
With clouds on the horizon for some traditionally defensive areas of the market and few signs of life in more growth-oriented areas, we have opted for a balanced approach, flattening our funds' sector bets across the board.
Although few sectors qualify as standout stories, our analysis suggests financials offer particular value, with high yields and low valuations. Although life assurance stocks have rallied in the past few weeks, there is further to go.
In terms of stock selection, we are concentrating on targeting cash-generative companies, whichever sectors they appear in, that are not suffering from significant pricing pressure or declining volumes. Where we can identify companies that meet these criteria, we are happy to take relatively aggressive individual stock positions.
Although we do not expect the UK market to decouple from the US, it is not all doom and gloom and some positive signals are probably being overlooked. There has been a sharp increase in directors buying their own shares and, at the same time, a growing number of share buybacks by companies.
One thing is for sure: if these green shoots do eventually translate into a recovery for UK equities, defensive stocks will not be at the top of the performance tables.
Growth holding up relative to US.
Share buybacks are increasing.
Valuations are attractive.
UK market trades in thrall to Wall Street.
Level of risk aversion is high.
Corporate earnings outlook is uncertain.
Staying invested could prove lucrative
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