But is there much wisdom in steering clear of risk assets until St Leger’s day (the second Saturday in September)? In all honesty, probably not, though research released yesterday by platform FundExpert.co.uk found that those who followed the maxim in 2010 and 2011 would have outperformed a buy-and-hold strategy in all but the most defensive sectors (bonds and gilts).
The St Leger method is understandably never going to win much support from fund managers, though from canvassing the views of professional fund and stock pickers, it is clear that UK equities in particular requires a different kind of selectiveness.
In a recessionary environment common sense suggests you stick with defensive sectors, such as tobacco or utilities. However, according to contrarian investor James Lowen, co-manager of JOHCM UK Equity Income Fund, too many of his peers are “loaded up” with this consensus at a time when many defensive companies are looking over-valued and over-geared.
“British American Tobacco (BAT) is on 14x earnings, while Unilever is on around 15x earnings; We hardly have any stocks in our fund that are over 12x earnings normally and these defensives are, in our view, on average quite dangerous because they are so expensive,” he remarks.
Getting it right first time
“You have to get the starting valuation right; there is no point just getting the fundamentals right if you are going into something that is too expensive.”
As we are so often told, the earnings from outside of the UK account for as much as two-thirds of FTSE revenues, while investors that do stick with risk assets face a balancing act in both ensuring that they benefit from the expansion of growth markets, yet also avoid being dragged down during times of trouble, such as the most recent eurozone sovereign debt crisis or during irrational commodity price movements.
Stuart Fox, analyst at City Asset Management, gives us a snapshot of the internationally-diversified nature of the index, and how hard it is to make the right call on a short-term basis.
“In March, there was a huge fall in basic materials, which fell by 8%, while oil & gas fell by 4%, but other sectors posted positive returns, such as utilities, telecoms, technology and consumer services,” he says.
“However, the weight of the exposure in the index to the resources stocks meant that the All-Share as a whole fell by 1%.”
Few options
Navigating your way through markets is never easy then, though we never expected it to be. However, to quote another maxim, you’ve got to be in it to win it, and in spite of the economic woes investors have few options beyond equities if they want to have a hope of earning returns above inflation.
You can read more on the UK and its recession-busting sectors in the May edition of Portfolio Adviser, out next week.
