THERE has been an increasing tidal wave of predictions of a market crash. The most recent has come from high profile fund manager Neil Woodford, whose impressive record over the past three decades does merit attention being paid. In direct contrast to the majority view, Mr Woodford is advocating buying undervalued UK orientated sectors and companies, whereas most investors are concentrating on overseas assets. He does have form in this contrarian approach: he spurned tech stocks in the run-up to the dotcom crash in 2000 and he avoided bank shares before the financial crisis of 2007. In both of these periods short term underperformance preceded long term outperformance. He has also warned that global markets are in a bubble that, when it bursts, could prove to be worse than some of the largest in history.
There is little doubt that some areas of the market are showing fairly extreme valuations: examples include the very high values of European junk bonds yielding less than US Treasury stocks, the phenomenal rise in the value of the virtual currency bitcoin to over $10,000 and some of the more obscure and convoluted funds, which often have a high level of gearing, seeing huge inflows of money. This has been the same for most of the recent stock market corrections. With the benefit of hindsight, it is obvious that in 1999 a portion of the stock market was displaying unrealistic valuations: price/earnings ratios that were phenomenally high despite companies being relatively untried and probably not even producing a profit. In the 1980s as a relatively new investment professional I was frequently told that the normal valuation rules did not apply to Japanese equities. Following this experience, the Nikkei stagnated for twenty years. Even the banking crisis, looking back now, showed classic signs of unrealistic valuations when the level of mortgage lending is considered (120 per cent mortgages).
Once again there are clearly very high valuations evident in certain sections of the market. However, there are also opportunities. It is almost always the case that the market overreacts both to bad and good news, hence Mr Woodford’s contention that some of the domestic UK stocks are pricing in economic Armageddon.
Somewhere in between the extreme stances there is a measured approach. There is clearly a great deal of uncertainty ahead for the UK as the thorny issue of Brexit is negotiated: there has been a lack of investment by some companies as they face a future of such great uncertainty. This is also not likely to be solved overnight as the politicians continue the very long and drawn out process of coming to an agreement. On the other hand, even with the recent downgrades to UK economic growth, it is still in positive territory: all out recession is not currently being predicted and much of the negativity should already be priced in.
Where does this leave us? At risk of repetition, going back to investment fundamentals is always a good place to start as is a well-diversified portfolio.
:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management ( SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
