Savaged value stocks are finally beginning to draw some attention from fund managers on account of t...
Savaged value stocks are finally beginning to draw some attention from fund managers on account of their cheapness.
The shares have reached such low levels as investors have been selling them off to fund purchases of technology companies but that process may be starting to reverse.
Gary Wright, director of balanced funds at Norwich Union Investment Management, says: "The share prices in some sectors such as retailers and brewers have been decimated. We have been investing in value plays to lock in the profits made from technology shares."
Companies which Norwich Union is favouring in particular are Halifax, Tesco, Scottish Power and Whitbread.
Wright adds: "These are companies with bombed-out share prices. Nevertheless they have a strong business franchise, with a management which is receptive to the new economy and has a clear strategy on how to participate in it."
According to Wright, UK stocks are the most attractively valued in a global context, especially compared to the US and Europe, and to a lesser extent the Far East.
Even though the stocks are cheap, there is no single obvious event which will trigger a rerating. Wright has examined the US market over the last 12 months and found three discrete periods when technology stocks as a group fell by 40% in price. But, after each period the prices recovered, showing that investor sentiment is unswerving in its devotion to the sector.
Wright says: "The only thing which might drill confidence down is a substantial bear market in the technology sector and nothing will prompt this in near future."
However, one wild card is interest rates, which may keep rising despite falling inflation. Norwich Union is bearish on the outlook for interest rates in the US as it considers that the Fed will continue to raise rates until the steam is taken out of the stock market. This could have a depressing effect on technology stocks.
Wright says: "We don't agree with the bullish view that interest rates are irrelevant to high growth stocks which can always raise money no matter what. There has been a rapid succession of IPOs in the US and it is starting here.
"These companies must start reporting soon. Investors will want to see some tangible returns. Higher interest rates and visibility of earnings will be instrumental in shaping share prices going forward."
Some fund managers predict a rerating can only happen when the love affair with technology ends. At Threadneedle, head of equities and managed funds Sarah Arkle is already seeing signs of investor disaffection, particularly with Japanese stock market darling Hikari Tsushin. Its share price recently halved on reports of its sales force being overly aggressive and that the CEO had been arrested for tax evasion.
She says: "Expectations of growth can get too far ahead of reality. Economic fundamentals still favour the sector but we don't want to be as overweight as we have been."
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