But, while he believes that there are a lot of stretched valuations at the moment, he does see pockets of opportunity, particularly in the value space in the US and Japan.
Play one
“The problem is that US equities have been scaling all-time highs against a relatively mixed background. What has happened is that the go-go growth equities in the US, the ones on really punchy price: earnings ratios, have absolutely flown, while a lot of the more traditional value stocks have been left behind,” he said.
Over the longer term, the US is likely to benefit from a dollar tailwind, Kitchenham said, as tapering begins to bite. But he added, there are other reasons to be positive on the prospects for the country.
Two of the main ones from a macro perspective he said are: the cheap energy that has been created by the discovery of shale gas in the country and the decline of the wage differential between the US and Asia, which has seen an increasing number of jobs returning to the country.
“We expect there to be a general, slow, underlying creep up in jobs being created in the US, which we feel will be good for the dollar in the long run.”
One of the main ways Walker Crips is playing this trend, Kitchenham says, is through its holding in the Brown Advisory US Equity Value Fund.
“It is a specialist US equity firm, and like it says in the name, they are focused on the value side of the US equity space. There are a lot of really good companies on really good valuations.”
Play two
The Japanese market too offers a lot from a value perspective, Kitchenham told Portfolio Adviser.
“You have seen significant QE and growth stocks have run as a result, while value stocks haven’t,” he said.
To play this market, Kitchenham says, the group is invested in the Polar Capital Japan Fund, which is run by James Salter.
“The fund, to an extent, in the early part of the year was left behind as all the growth stocks shot forward and the value stocks went nowhere. But, we like the fact that he sticks to his guns and has stuck with the strategy.”
Kitchenham added: “He believes, I believe, I think the whole world should believe that there will be a snap back because ultimately these things always come back and correct themselves – sometimes you just need to be patient.”
The sweetener
The third play about which Kitchenham is particularly excited is frontier markets.
As a small part of a portfolio it is a very interesting area with a surprisingly low correlation to western equities.
Given that most are rather illiquid markets, Kitchenham said he prefers to access them via closed-ended products because you don’t want manager time taken up trying to invest and redeem huge amounts of money as investors flow in and out.
Currently, Kitchenham is accessing these markets through the Blackrock Frontiers Investment Trust.
A lot of these countries are growing really fast and there are a lot of good companies around to take advantage of. And, importantly, at the moment, most are under-researched, he said.
“From a strategic point of view, it would only take a small change in asset allocation around the world for there to be a huge flow of money into these markets and we want to be there before that happens.”
