Schroders’ Richard Buxton has suggested that current equity valuations are presenting a strong buy signal after reiterating his prediction that the UK could be in “foothills of a new bull market”.
The manager of the £3.6bn Schroder UK Alpha Plus fund told the Cazenove Private Client Investment Seminar that the low growth outlook for the UK is not good reason for assuming that the stockmarket will fare equally poorly.
“Growth has nothing to do with stockmarkets. Never believe a fund manager who tells you ‘look at the GDP growth, ergo buy the stockmarket’. There’s absolutely no correlation,” he said. “The key that drives stockmarkets is not economic activity but the starting valuation.”
Citing Oriel Securities data, Buxton noted that UK equities have never failed to deliver an average 10-year total return when the starting valuation was at a price/earnings ratio of 12x, where the FTSE 100 currently sits, or below.
The manager also argued that it is essential to choose the right time to invest in equities: “Everyone says market timing is impossible to do so don’t do it. But actually you have this wonderful clue called valuation.”
According to the Barclays Equity Gilt Survey 2012, a UK equity investment of £100 in 1900 – in a bull market – would have dropped to £28 by 1920. The investor would have to wait another 40 or so years to see a positive return, with the investment reaching just £108 at 1959.
However, Buxton noted that £100 invested in 1920 would have grown to £258 by 1928 and then risen to £341 in 1936.
“Market timing does matter and valuations are your guide,” he said. “We know there are lots of negatives to growth out there but they are widely known and we discuss them in ways we did not 12 years ago and that must be reflected in valuations when the market’s at 12x earnings.”
The FSTE has dropped to 3,500 twice in the last 12 years, in March 2003 and March 2009, but Buxton argued there is no indication the market is heading towards a new low. This suggests to the manager that the UK is not in a bear market.
“No matter how bad things get I can’t see us down to 3,500 again,” he said. “So if we’re not revisiting it, we are essentially in the foothills of a new bull market – it is only with the benefit of hindsight that we will be able to look back and say ‘we were already through the worst’.”