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InterestingLeigh – Taking stock

Leigh Himsworth, head of UK equities at City Financial and manager of the CF Eden UK Select Opportunities Fund, provides commentary for June

The rally in equity markets sparked by two significant events, firstly supportive words from Head of the ECB Mario Draghi and then the launching of Abenomics in Japan, is posing significant questions of investors. Indeed, due to these driving factors there is much to suggest that monetary stimulus lies very much behind the new found desire to invest in all that is Equity. It also goes some way to explaining the leadership in markets driven in large part by more liquid, even defensive stocks and the weakness in commodity related areas as investors have sought to move away from the perceived safety offered by lumps of metal. As markets are now up 27%* since June 2012, has this all gone too far?

Looking simply at charts, one would have to answer yes – they look terrifying, but as a wise youngish colleague used to point out to me, ‘Charts are for sailors’. On a fundamental basis then, is there still appeal? Quite definitely yes. On most metrics, the UK market still offers value, certainly against most other assets classes; it offers forecast rates of earnings growth of 6.8%, a forecast dividend yield of 3.7% with growth of 7% and all standing on a forward p/e ratio of 12.3 times. Not bad, I hear you say, I might not just do a cash ISA this year.

So where is all of this value? It now seems clear that investors believe the authorities will take every measure they can to support economic revival and this has led to a rapid take up of so-called ‘risk assets'. The first stop has been to seek out more defensive areas which initially tended to be those stocks regarded as value plays. To a degree, the belief in recovery has also given momentum to areas of the market where fear existed, house builders being an example.

Investment over the foreseeable future then depends on one’s view of the outlook; have we passed the worst, will the monetary and fiscal measures work, are we seeing genuine recovery? I believe that yes is the answer, but let’s not get carried away and believe that GDP is about to race away and all of our ills are forgotten. I remain of the view that any recovery will be a long and drawn out process. Looking forward with this stance implies a broadening of the recovery and a more discerning approach. I strongly believe that as growth will be hard to find, investors are likely to pay a premium where they find it; growth and quality are the answers. These should also provide some safety should the brakes come on again or the debate grow as to the mechanics of bond yields normalising.

I do not share the fear of some of a huge resurgence in inflation, and I do not fear a large jump in bond yields. We need a huge take up in capacity and in the money supply for this to happen; this is not so – there is a significant difference between printing of money and the money supply.

For my part, I try to break the opportunities down into themes and differing time scales over which they are likely to come to fruition. In the near term I am seeking income, in stocks such as RSA Insurance, Legal & General and Vodafone. Next is to invest in stocks where structural change has only limited effect – Booker and New River Retail are examples. Further to this are those which are structural change winners – William Hill, N Brown and Paypoint I include amongst these. The UK gives opportunity to invest in most economies in the world and most industries. A general play can be through Oil stocks and Industrials. Recovery I can play through exposure to Elementis, Speedy Hire and Kier Group.

Next are perhaps the longer term trends – financial services, strong growth opportunities, and unique assets such as Ashcourt Rowan, GB Group and Genus. Lastly, there are always some special situations, where fundamental change is altering the underlying attractions of a company. In summary, I remain happy to invest; though am fully aware from time to time we will be whipsawed around and I view these setbacks as a chance to invest rather than panic.