Emma Wall: Hello and welcome to the Morningstar series 'Why Should I Invest With You'. I'm Emma Wall and here with me today is Richard Buxton, manager of the Old Mutual U.K. Alpha Fund.
Hello Richard.
Richard Buxton: Good morning.
Wall: So thought we'd start by looking at stock market prospects. We've had quite a few managers including the sort of bearish Sebastian Lyon saying, you know get into defensive stuff now. The market is going to correct, U.S. and U.K. both looking over valued. Although it does continue to use your phrase 'grind up' where either we were a year ago, two years ago, three years ago, can this continue?
Buxton: Well, you are absolutely right that it's not a cheap market anymore and five years ago, you could find all sorts of bargain-basement shares which you know is lot harder today. But let's not forget, we're still in this extraordinary elongated post financial crisis recovery process. It is a multi-year phenomenon and activity is still gradually improving.
As long as that is the case and profits are continuing to move ahead, I think any setback would only be a modest correction. I know there is an awful lot of investors who do have cash to invest. They are waiting for some setback. So perversely any setback is very brief and temporary. So I think looking at the long-term, the three to five year outlook is still a pretty constructive one.
Wall: You say three to five years there. We've of course already had five years of rally. Some people think that a market last five years, so what's to say that this will continue?
Buxton: It is precisely this point that this is not a normal economic cycle which is typically around five to seven years, and then yes, as you get towards the end and the central banks are raising rates to calm down an overheating economy, well, we're not overheating. All the academic suggest that post-financial crisis, it's kind of 15, 20 year of healing process, so the fact that companies have got their balance sheets in good shape now, they are beginning to invest a little bit, little bit of M&A activity, and this is not a stage where they are going to start really jacking interest rates up.
You know inflation is non-existent. So it feels more like a kind of mid-cycle to me and so that's why the traditional five to seven year, gosh, it's time to be much more defensive. I think it's too early. I think that actually you can see as long as activity is continuing, two steps forwards one step back to improve, the U.K. economy is in good shape. The employment keeps rising. We're just beginning to see a little bit of wage growth which is good. And as long as we see this for the next several years, then actually we may not re-rate anymore. But if we can just get the profit growth and some good dividend growth then the market can grind hard.
Wall: Looking then at the sort of near term challenges you mentioned interest rates there, also in a month we've got the election. These sorts of things breed into uncertainty, markets don't like uncertainty. Does this mean that it's going to create buy opportunities or does this mean that people need to be, be wary?
Buxton: Well, our interest rates and I've long felt that Bank of England wouldn't begin to raise rates until well after the election and seeing who was in charge and what the fiscal policies were likely to be. I still think it's far more likely that it's the U.S. we must look to. I still think the U.S. is in a stronger position they are a year or two ahead of us in economic growth and personally I think it would be good if the Fed did start to gradually start to raise short rates and then we can see if bond deals just sort of backup gently and that would might provide some modest correction that would be a buying opportunity.
On the election here short-term, it's clearly very difficult to call the outcome and it may be that as with the Scottish referendum it's only literally as we get to days ahead of it that the market has a bit of a wobble. And to be honest it hasn't affected the way I'm running the portfolio even if some of the more draconian measures of, let's breakup the banks. We know albeit there will be knee-jerk reaction on the day, but it's taken years to actually carve out TSB from Lloyds, Williams & Glynn's from RBS. So this is going to be a long process in which there's going to be lots of further sets of results and dividend announcements and so on.
So, I think knee-jerk reactions, yes, but I'm a very long-term investor. So, it's a lot easier to say this because sterling has already weakened quite a lot against the very strong dollar. 1.50 is around PPP, we were at 1.72 last summer, so it's possible that sterling may weaken some more against the euro, but again perversely that's not bad news for U.K. companies doing business in Europe. So, again it's more likely that any electoral duties we felt initially through the currency rather than the stock market.
Wall: Richard, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
