Stock market: Looking for value left out there?

Julian Knight wonders where’s the best place to find a bargain

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The Independent Online

Against the backdrop of economic gloom, eurozone crisis and austerity there has been one silver lining for investors over the past few years – the stock market. In fact the comeback in the stockmarket has been eye catching – gaining 25 per cent in the UK’s case in just two years – comparable with almost any bull market since the war.  Stateside the bounce in the stockmarket has been even more pronounced, with the Dow Jones breaking all records and topping 16,000.  Twitter’s IPO, for a business making no money, surged to new heights, while here we had the Royal Mail doubling in value almost overnight. These are heady days for the stockmarket, but is a lot of this growth already done with, is there any value out there for investors?

Most experts agree that there is but it is not easy to spot at first, or even second, glance.  “The UK market is fair value at the moment and smaller companies listed on the stock exchange are actually looking on the expensive side,” Darius McDermott, managing director of Chelsea Financial Services, said.   Most sectors within the market are trading at what he calls their “long-term average”, which means the share price is roughly in line with historic norms in relation to company earnings.  Surprisingly, given the hoo-ha over the astronomical prices achieved by Twitter in its IPO, technology is one sector trading below long- term trends. “Technology is the most undervalued sector at the moment (globally and in the UK) but is one of the most exciting in my view. It spans all sectors from healthcare to the consumer and the opportunities are boundless. Once governments and companies start spending again, the sector should get an extra boost,” Mr McDermott said.  Rather than investing directly into technology shares, which can be high risk, he recommends collective investments such as unit trusts with managers employed to stock-pick: “In this field I like the teams at AXA Framlington Global Technology and GLGTechnology Equity funds for investors wanting a piece of this action.”

Adrian Lowcock of independent financial advice firm Hargreaves Lansdown likes the pharmaceutical and healthcare sector which can benefit long-term from medical advances and ageing demographics. “Healthcare, which has been a favourite amongst equity income managers, continues to look like good value.    The pharmaceutical sector looks cheap relative to its own historic valuations. Combined with an impressive track record of consistent earnings growth and lagging share prices over the past 10 years it is easy to see why some leading fund managers like the sector.  At present valuations the market does not value the pharmaceuticals’ R&D divisions, in other words it does not expect them to deliver another big drug,” Mr Lowcock said.  Rathbone Income and Newton Global Higher Income are two funds he says are well placed to make the most of any uptick.

Ben Stapley, UK equities fund manager for JPMAM, identifies the economic recovery now gathering pace in the UK as a buying opportunity but not across the board. He said: “Look for companies doing buybacks and paying special dividends.  Easyjet would be a recent example of a major special dividend payout.  They are well capitalized, growing their topline and increasing margins.” 

Outside the UK, experts are generally cool on the US stockmarket. “It is at an all-time high and stocks are standing at very rich valuations compared to their long-term history. Some of the recent social media IPOs have exhibited bubble-like characteristics,” said Jason Holland from Bestinvest.  The eurozone on the other hand is in recovery mode. It is often said that the stockmarket tends to grow in advance of the real economy and if that is right then the eurozone, so long a Cinderella, may be worth more than a look. “Growth outlook remains weak, credit conditions are poor and deflation is a threat. However with Europe staring down the barrel, we feel there is now an irresistible move towards further stimulus, like the surprise rate cut earlier this month. A fund that could benefit would be Baring European Select, with a small and mid-cap bias,” Mr Holland said.

Further afield, emerging markets – such as China, which this week unveiled reforms to further open up its economy – have underperformed in recent times, which could mean they are now undervalued and shunned by investors. “Having had three or four years of relative underperformance compared with developed market counterparts, emerging markets are very unloved - only 4 per cent of clients polled by us last month said they were considering investing in emerging markets) and most (with the exception of Brazil, Taiwan, South Africa and Mexico) are now cheap versus their long-term average - particularly Russia, China and India and frontier markets,” Mr McDermott said.

 What’s more, the long-term story of emerging markets such as a young, growing population and economic growth rates the West could only dream about are still in play. But it is very difficult to invest in direct equities in these markets, so a fund manager for private investors is a must. Mr McDermott favours JPM Emerging Market Income and M&G Global Emerging Markets. Such investments have risks, with currency moves and political upheaval in some emerging economies. It is not for the faint-hearted, but after three years of generally upwards moves in global stockmarkets good value is becoming harder to spot.

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