The UK Alpha Fund manager highlighted the beginnings of a wholesale move back into value plays, something he has long been positioned for with his long-term holdings in banks and miners.
However, he stressed that it will take years to unwind the trade from bond proxies back into cyclicals, and investors should expect more volatility to come.
He said: “The truth is I’d be delighted if the market went down 10%, as it would signal a return back to the real world. Equity markets shouldn’t be gaining like this every year.”
He added: “Banks – still under-owned and trading at book value, or less, here in the UK – producers of commodities such as iron ore and copper, and most stocks which have a degree of cyclicality attached to them should be the clear winners for 2017, in my view.
“But let’s not get too carried away. Stock markets, especially in the US and, to a less extent the UK, have already marked the prices of these stocks higher.”
HSBC, Barclays and Lloyds remain as top-10 holdings in Old Mutual UK Alpha Fund, and despite RBS’ recent failure of a Bank of England stress test, he believes UK banks remain “rock solid”.
“In the long-term, investors will re-rate banks,” he said.
“They will trade above book value because they are genuinely safe investments that will throw off cash dividends.”