The market's silver linings
After the worst week in market history, shell-shocked investors are asking: have we hit the bottom? James Daley put the question to three bullish UK fund managers
Saturday 11 October 2008
ANTHONY BOLTON, FIDELITY INVESTMENTS
Bolton is perhaps the UK's most successful fund manager. He is now retired from his job running Fidelity's Special Situations fund. In his 28 years as its manager, he helped investors increase their money almost 150 times over.
Bolton has never seen a financial crisis on this scale, but he believes that stock markets are now at, or very near, their lows, and that there are more opportunities for investors today than there have been for some time. He says he's already upped the amount of his own money he's putting into the market, for the first time in two years
Bolton's reasons for optimism aren't macroeconomic; the UK is almost certainly in recession for the first time in almost two decades. But he believes the high level of dividend yields compared to gilt yields, and the large cash positions in mutual funds and hedge funds, are good indicators that the market's fortunes may be about to change.
"In some sectors, I'm seeing the lowest valuations I've seen in more than 30 years," Bolton says. He says he likes the look of the consumer cyclical sectors, such as the general retailers and media stocks. "Media has underperformed the market for the last seven consecutive years, and both [retail and media] are unloved by institutional investors [at the moment]," he says.
Bolton believes there are opportunities in the troubled banking sector, too. He suggests buying a basket of well-capitalised banks. "Above all, look for well-financed companies, as lending conditions will remain tight for the foreseeable future and as companies come to refinancing their loans, they will find it hard to get decent terms."
Finally, he advises investors alarmed by the market falls of recent weeks to keep their nerve. "Too many private investors get sucked in at the top and shaken out in difficult times – the opposite of buying low and selling high," he says. "Most importantly, don't become more bearish the more market conditions worsen."
EDWARD BONHAM CARTER, JUPITER ASSET MANAGEMENT
Bonham Carter, chief executive of Jupiter Asset Management, is one of the most respected voices in Britain's investment community. He believes it's still too early to establish what the full consequences of the current crisis will be, but agrees with Bolton that there may now be some good opportunities in the market for investors. "It is worth remembering that the kind of extreme volatility we are seeing, while unnerving for investors, is often driven by short-term sentiment and does not tend to reflect the real long-term prospects for the economy and individual companies," he says.
"As Warren Buffett has shown with his bold investments in Goldman Sachs and GE, these types of conditions can engender an ideal environment to purchase potentially strong-performing companies at low prices. Moreover, we are now 16 months into the current bear market, making it look rather long in the tooth. Most last about 18 months as markets often turn long before the economic cycle."
Bonham Carter believes the companies likely to be in favour are those who have solid yields, but not those who manufactured higher returns through high leverage. "It is worth remembering that, over time, the majority of investors' total returns from equities come from dividend growth and the reinvestment of those dividends. Profit warnings will undoubtedly increase, some companies will have to cut their dividends and the overall yield on the market will fall as the banks cut their payouts. But there are still plenty of well-managed companies that will be able to grow their dividends and being able to buy their shares on yields of 4 to 6 per cent looks attractive."
BILL MOTT, PSIGMA INVESTMENT MANAGEMENT
Mott has been one of the most respected income fund managers for 30 years. With a PhD in quantum physics, there's no questioning his intellect.
Like Bolton, he believes we are now being offered a unique opportunity to buy quality UK stocks at distressed prices. "The reason we are being given this opportunity is because some investors believe this could be a once-in-a-century Armageddon," Mott says. "But we think Armageddon will be avoided and, looking out three to five years, share prices today will have looked like a huge buying opportunity."
He says the key to markets turning round will be the restoration of confidence in banking. But once this crisis is over, he believes the surviving banks will be in a strong position, with the opportunity to earn wide margins.
Other sectors he believes are undervalued are the pubs. "Some pub operators are priced as though no one will ever buy a pint or a burger in a British pub again," he says. He likes the look of some building material companies and housebuilders, which are pricing in "a decade or more of misery".
"We believe life will be tough, but not to these extremes," Mott says.
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