Richard Buxton, Head of UK Equities at Schroders, believes most professional investors are not correctly positioned to take advantage of a market rebound. Speaking on Tuesday at the third annual Morningstar Investment Conference in London, Buxton said many professional investors have been distrustful of the market rally, particularly as it has been led by the “nasty banks.” Though there is bound to be volatility over the next few months, Buxton himself believes the rally is quite well underpinned and we have reached a “significant turning point,” after which there is plenty of scope for a recovery in UK equities.
Buxton, a leading fund manager in the UK, added that in his experience “The path that will cause the most pain is the path the market will follow” and he therefore expects this rally to continue as most professional investors are unprepared for it to do so.
Highlighting that stocks to play are those that are valued cheaply but that aren’t owned by the rest of the crowd, Buxton pointed out that those industries that have traditionally been viewed as defensive—BP and Royal Dutch Shell, pharmaceuticals, tobacco producers and utilities—are now extremely cheap but due to their defensive reputation are already widely owned, hence why professional investors are "hating" this rally.
Before this week's moderate decline, the FTSE 100 index had surged 28% since early March, led by financials and commodity plays and spurred on by hopes the economy could have hit its bottom. Profit-taking and a handful of less upbeat economic reports this week, however, have caused the UK benchmark index to slide back almost 3%. Still, Buxton warned investors earlier this week against too much profit-taking. “Don’t sell too aggressively stocks that have had a huge bounce of late,” he said, “as they have bounced from remarkably depressed valuations to cheap and you don’t sell something that’s cheap, especially if not many others own it.” On the flip-side, Buxton said he has also been adding to his holdings of, for example, Royal Dutch Shell and GlaxoSmithKline, as their underperformance means these are also cheap. These stocks won’t make an investor any money in the short-term, he pointed out, but in the long-term they’re growth stories and now is a good time to pick some up.
Market levels are currently pretty attractive for long-term investors and though Buxton sees only limited economic growth in 2010, he believes it should be sufficient to support the markets. Longer-term headwinds to growth, given the lack of credit creation, are very real and we are set up to experience a “very hard and unpleasant” economic situation in the longer-term, Buxton said. With huge cuts in public spending likely, leading to substantial cuts in public sector jobs, and individual taxes set to increase, the signs aren’t good for economic growth, Buxton told the conference delegates, but this does not mean that equities can’t increase in value.
Furthermore, if the UK housing market is 18-24 months behind that of the US, which saw a drop of 35% in prices from peak to trough, this would imply an additional 10%-15% fall is still to come for UK house prices. Commenting on currency developments, Buxton believes sterling has stabilised against the dollar: “In essence the big move is behind us” and although economic news could see the pound fall back to, say, $1.30, Buxton suspects it won’t be held at those low levels and should return to levels around $1.50. He also emphasized the need for small- and micro-cap equities to contribute to UK market growth but expressed concern that the government’s plan to hike taxes for the top income band could dampen entrepreneurial spirit in the UK.
Warning of the risk of a ‘false dawn’ or a W-shaped recovery, Buxton said it will take many years for the UK economy to recover to proper levels of growth but in the meantime it is clear that we are not in a multi-year depression; this is just another recession, of the like which we have dealt with before and will likely have to do so again. “Things are not as bad as they were and we're beginning to see the impact of various policy initiatives," Buxton commented.
