JAMES LOWEN, senior fund manager of JOHCM UK Equity Income fund on UK Income
A mismatch exists between the top-down macro and the bottom-up micro environment.
Despite encouraging data from the UK and Germany, the last few months have seen a series of negative macroeconomic developments, all of them effectively adding up to a significant and possibly premature withdrawal of the economic stimulus.
While greater austerity measures in the UK are welcome, the collective effect of the tightening put in place across Europe will inevitably slow global growth rates. However, there is a reasonable chance the watering down of the Basel III capital requirements for the European banking sector will provide a considerable offset. A number of the more capital-constrained UK and Continental European banks will now no longer have to sell assets in a fire sale process and, more importantly, will be able to start lending again to companies and consumers.
Bottom-up investors continue to be excited by the low valuations on offer. This is the case whether it is at the aggregate level or whether it is at the individual company level, with hundreds of stocks being valued on single-figure P/Es, with dividend yields of over 5%, free cashflow yields of over 10% and frequently ungeared balance sheets. Encouragingly, cash-rich companies, particularly dollar-denominated buyers, are taking advantage of these low valuations and engaging in M&A activity.
Despite a strong rally in July, investor confidence took a major knock over the summer and may take time to recover. Nevertheless, valuations are modest for large parts of the market and the positive reaction of the currency and bond markets to the UK’s coalition Government and recent economic data gives us encouragement that UK domestic assets will get re-rated at some point.
James Lowen is senior fund manager of JOHCM UK Equity Income fund
