Analysts and portfolio managers at Lazard Asset Management say there are still good values to be found in share prices on both sides of the Atlantic, with some caveats.
Data covering the UK since the start of the “cult of equities” in the 1950s suggests yields on shares and corporate profits as a percentage of GDP are still at points where equities offer good value against fixed income.
UK plc profitability still has “momentum, says Alan Custis, director and portfolio manager of UK equities.
Gabrielle Boyle, senior marketing director and senior portfolio manager responsible fore European equities, says European stocks are not quite as cheap as UK ones.
Return on equity is still “a lot higher” than Asia, Boyle says, suggesting a lot of recovery is yet to come across the Channel.
Lazard’s view on the US market is chastened by the amount of debt facing policymakers there, particularly with regard to the upcoming election.
Debt levels are running about 300% of GDP, while corporate profitability improvements may be nearing their peak, Lazard adds.
Additionally to region-specific issues, stock picking in any market faces a technical hurdle in so-called P/E compression.
This means the range of price/earnings ratios between low P/E stocks and high ones narrows, meaning there is little difference between “cheap” and “expensive” stocks on this measure.
Such compression also occurs within sectors, says Tony Willis, managing director and head of UK equities, who cites a range of P/Es between 8x to 9x in the banking sector despite great differences in, say, the rate of loan growth reported by different UK-listed banks.
The focus of the fund manager then has to become one of searching out quality as opposed to relying on valuations, he says.IFAonline
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