Billions of pounds have been wiped off shares since the credit crunch derailed
the markets almost a year ago, sending investment and pension funds
tumbling. Since June the FTSE 100, the index of Britain's leading shares,
has fallen more than 9 per cent, knocking the confidence of even hardened
investors.
However, a more positive mood is beginning to emerge with some of Britain's
leading investors saying that the worst is behind us. Even better, say the
bulls, investors willing to take a punt can pick up shares now at bargain
prices.
On some measures, shares have not looked so cheap since the 2003 “Baghdad
bounce”, when the stock market reached rock bottom after the dot-com bust.
The index hit 3,287 on March 12, 2003, rising 29 per cent in the following
six months.
So for brave investors willing to hold for the long term, now could be the
time to start dipping a toe back into the market.
Mark Barnett, manager of the Invesco Perpetual UK Strategic Income Fund, says:
“On our analysis, shares look cheap, with a price/earnings [p/e] ratio for
the whole market of under 12 times, and a dividend yield of more than 3.5
per cent. This is evidence of the scale of the de-rating of the UK equity
market where, in the late 1990s, the p/e of the UK market was well over 20
times.
“We believe this is a big opportunity where you can actually buy companies
with very low earnings volatility but at valuations which are at a discount
to the rest of the market.”
The FTSE has already jumped about 12 per cent since hitting a low of 5,414 in
March. But analysts say that the rally has been confined largely to mining
stocks, while many other sectors of the market look great value.
Mining shares have risen, on average, 8 per cent over the past three months
and are 43 per cent higher than this time last year. But the battered
banking sector is 9 per cent lower than three months ago and is 35 per cent
down over a year. Other beleaguered sectors, such as life insurance and real
estate, have also continued to slide.
There are still considerable risks, with a growing number of commentators
saying that economic woes in America, where some believe a recession is
under way, are spreading overseas.
Growth in the UK economy during the first three months of this year was the
weakest for three years, according to the Office for National Statistics,
while last week Legal & General, the insurance company, said that more
recession indicators are flashing red in the UK than at any time since 1990,
when house prices and economic growth slumped.
There are also fears that company profits will start to disappoint. Dividends
could also be cut as companies struggle to maintain margins as costs,
particularly the price of oil, remain high.
However, more bullish commentators believe that even if the economy slows
sharply, you could still make money by picking up shares selectively. To
help you to decide if the time is right to move back into the stock market -
and where you should invest - we gauged the views of six of the UK's leading
investors.
Investors' reveal their top picks for recovery
Anthony Bolton, Fidelity Asset Management: “I don't think we've yet had
a long enough or deep enough bear market by historic standards. We're in a
period of two or three years of banks being less prepared to lend, and that
overhangs everything. We could see a fresh low towards the end of this year
or next year.
“However, some of the best relative returns can come in difficult markets. For
a medium-term investor, a package of bank shares would be a good thing as
the upside will come as they rebuild margins.
“Companies with strong balance sheets in cyclical industries, such as
housebuilding and retailing, could also do well.”
Advice: Buy banks
Edward Bonham Carter, Jupiter Asset Management: “We're moving through
dealing with the credit crunch but it's difficult to predict how long it
will continue.
“The big question beyond the credit crunch itself is how far Western economies
will slow at a time when interest rates are on the rise in emerging
economies grappling with inflationary pressures.
“Unless unemployment rises sharply, we don't expect a recession in the near
term and continue to believe that blue chip shares look attractively priced
in the medium term when compared to other asset classes, such as gilts or
property.
“The continued commitment of FirstGroup, the transport group, to 10 per cent
dividend growth, together with strong growth prospects, make it an
attractive investment.
“Prudential continues to enjoy strong growth from its Asian businesses. BP is
also interesting. It recently raised its dividend by 33 per cent in sterling
terms and, as long as oil prices remain high, intends to return a greater
proportion of cash back via dividends in future.
“I also like Reed Elsevier, the out-of-favour publisher, whose business is
sheltered from the macroeconomic cycle.”
Advice: Back blue chips
Guy Monson, Sarasin: “We believe that the worst of the global credit
crisis is now largely priced into financial markets. Between the beginning
of April and the start of May global equities rallied. This almost uniform
uplift in share prices worldwide is a typical reaction both to improving
liquidity conditions and to a general lessening in risk following recent
central bank intervention.
“The bailout of US investment bank Bear Stearns by the Federal Reserve in
March marked a turning point. This aggressive move to prevent the bankruptcy
of one of Wall Street's largest banks signals the determination of
policymakers to ward off systemic breakdown of the financial system. With
the Bank of England also willing to act as the backstop for bank balance
sheets, this is itself a reason for higher-risk assets to rally.
“We are, therefore, adding to noninvestment bank linked financial stocks, such
as Prudential, the insurer, which has exposure to the growth area of the Far
East.
“Asset managers, such as Schroders, also look interesting. We remain cautious
about the banking sector itself but Standard Chartered is attractive because
of its exposure to Asia and Latin America.”
Advice: Look at overseas earners
Teun Draaisma, Morgan Stanley: “Bulls will now say that valuations
appear cheap and investors are underinvested, and that with the Federal
Reserve at the end of the rate-cutting cycle, the outlook for equities is
bullish.
“Because fundamentals were so bad, everyone was sceptical when we first called
for the beginning of the bear market rally at the end of January. Now, when
we say the bear market rally is over, people say that this may last a bit
longer as the momentum is so strong and the slowdown maybe not that bad. It
is amazing how market sentiment changes quickly.
“Our view is unchanged: this is strength to sell into. The European slowdown
is only just starting, judged by the recent business surveys, and the
reporting season gave early signs of the financials' trouble spreading, with
disappointing numbers or guidance from the likes of Nokia and Michelin.
Banking crises take a long time to solve and we expect a longer period of
sub-par growth. Patience is key and we recommend investors stay in defensive
shares, such as energy, pharmaceuticals and utilities.
Advice: Stay defensive
Graham Ashby, Credit Suisse Asset Management: “Regulators and
governments have recognised the scale of the problem, as have the banks, and
valuations are looking pretty good.
“The economic outlook is not so positive. There is pretty strong evidence that
America is close to recession and what happens there tends to happen here as
well. However, the saving grace is that a lot of companies are in pretty
good shape.
“We don't own any housebuilders but like companies that have the housing
market as their end customer, particularly SIG and Speedy Hire. [SIG
distributes insulation and roofing and Speedy Hire provides equipment to the
building industry]. We don't think they will be too affected by the slowdown
in the UK housing market because they are well diversified, internationally
and in terms of their end customer.
“We still have concerns about the banks but some financial companies are in
good shape. Man Group, the hedge fund manager, is doing well as is Royal and
SunAlliance, the insurer.”
Advice: Be selective
Niall Paul, Morley Fund Management: “The effects of the credit crunch
are going to persist, affecting corporate earnings and consumer spending.
Companies dependent on spending or the housing markets are already coming
under increasing pressure.
“However, a lot of that bad news is already reflected in stock market prices.
Perhaps the biggest risk is a further rise in oil prices. We think $150 a
barrel is possible, and that would knock the market back.
“There are opportunities, though. Pharmaceutical companies such as
GlaxoSmithKline and AstraZeneca look good value and their dividend yields
look well underpinned.”
Advice: Consider pharmaceuticals
Case Study: Taking a risk for long-term gain
Nicola Smith, from Lewisham, in South London, believes that battered financial
stocks will be a money-spinner over the longer term. Ms Smith, a personal
assistant at a law company, invested in the New Star Global Financials fund
earlier this year, at a time when the banking sector was in crisis.
Financial stocks from insurers to fund management firms were plunging in
value as the credit crunch was at its worst.
But Ms Smith, 30, thinks that the turmoil in the sector means that financials
now look good value. This has thrown up opportunities that she hopes the
fund's manager, Guy de Blonay, will be able to exploit.
She says: “I am not too concerned by the credit crisis because I am investing
for the long term and can afford to take a risk. I think this area of the
market has great potential.”
