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W
hen the equity
market reaches
extremes – be
it very cheap or
very expensive
– it is easy to knowwhat to do.At times
of fear and panic, investors should
snap up bargains; and when euphoria
prevails, selling is a simple decision. Such
an approach aims to take advantage of
human emotions; specifically, investors’
low tolerance for short-term bad news
and a tendency to extrapolate current
trends when forming future expectations.
A 130-year history of equity market data
shows that the price you pay is the key
determinant of whether or not you will
make money with an investment.
Today, the UK equity market is at
neither extreme and, as a consequence,
the range of possible outcomes is diverse.
In 2009, despite the pervading feeling of
economic despair, we felt a strong sense
of valuation-driven optimism. In 2014,
the opportunities and threats to the UK
equity market are far more balanced.
As contrarian investors, today’s
increasingly optimistic market outlook
suggests prudence may be warranted.
Another factor suggesting caution is
the dramatic narrowing of valuation
dispersions within the UK market over
recent months. Put simply, the valuation
dispersion is the difference between the
cheapest and most expensive parts of the
market.As it reduces, bargain hunters are
offered less reward for their investment
risk and there are fewer companies
welcome
to the
investor
centre
P
olitical events were a key
influence on global
markets in the first quarter of
the year.The toppling of the
government in Ukraine and
subsequent Russian activity in
Crimea affected investor
sentiment in both these
countries, and raised concerns
about a return to the tensions
that characterised the Cold
War.The economic news was
reasonably encouraging,
however. US economic
indicators did show some
impact from the prolonged
cold spell there and
uncertainty over the way in
which new Federal Reserve
chair JanetYellen will proceed
with the unwinding of its
quantitative easing (QE)
programme of economic
support. Corporate news from
Europe is improving and
growth in the UK is returning
more strongly than had been
anticipated. Emerging markets
are likely to remain volatile as
QE is gradually withdrawn.
in this section
22 Viewpoint
Kevin Murphy and Nick Kirrage, Schroders
24 Unit trust Portfolios
26 Fund manager commentaries
38 Final word
Adrian Frost, Artemis, shares his philosophy
fund manager viewpoint: Kevin Murphy and Nick Kirrage, Schroders
Viewpoint
KevinMurphyand
NickKirrage, Schroders
TheManaged Growthmanagers on why
patience is very much a virtue
22
|
THE INVESTOR
trading on exceptionally cheap valuations
for us to choose from.This makes it
harder to recycle capital into new ideas.
However, there are also reasons to be
optimistic about the future. First, after
several years of recession, the economy
is now growing again. Given how
depressed economic growth remains
versus pre-crisis levels, this is a significant
opportunity. Second, despite the
downturn, over the past five years many
UK companies have cut costs,maximised
cash generation and repaired their balance
sheets. Profit margins are healthy and
stronger balance sheets provide a greater
‘margin of safety’ should the economic
recovery hold further twists and turns.
Finally, and most importantly, aggregate
UK equity market valuation levels are
not egregiously expensive.Today, they
suggest average real returns of 4-5% per
annum over the next ten years – slightly
below the long-run average, but not a
major cause for alarm.
Where are the most compelling
investment opportunities today?We
believe that domestic UK banks are not
only cheap, but also have the potential to
grow and sustain dividends in the coming
years.Vilified by the press, they remain
firmly‘out of favour’, but much has
changed in the six years since Northern
Rock went under.
Let us consider the risks to the banks’
solvency.The best way to assess the
strength of a bank’s balance sheet is
through its tier-one capital ratios, which
are effectively a shield against bad debts.
