Invesco Perpetual head of UK equities Neil Woodford has warned equity valuations are “no longer as compellingly cheap” following the rally that has dominated the market in recent months.
Global stockmarkets have risen strongly over the last year, after Mario Draghi made his commitment to do “whatever it takes” to protect the eurozone and central banks pledged to keep monetary policy loose to stimulate growth. Markets have also done well over 2013 so far, after the avoidance of the US fiscal cliff helped encourage many investors to return to equities.
In the annual financial report for his Edinburgh Investment Trust, Woodford says: “The UK stockmarket’s rise of the past year, fuelled by monetary stimulus and central bank policy initiatives, has occurred despite cuts in forecasts to economic growth and associated reductions in the forecasts of company earnings – most notably in the mining sector but also across the a range of companies most exposed to the economic cycle.”
Woodford goes on to argue this has altered the outlook for UK equities. He says: “Equity valuations on the whole, therefore, are no longer as compellingly cheap as they were a year ago.”
The Edinburgh Investment Trust achieved a net asset value total return (with debt at market value) of 22.4 per cent over the year to 31 March. This compares with a total return from the FTSE All-Share Index of 16.8 per cent.
Woodford highlights strong performance across the pharmaceutical sector, while the trust’s zero per cent weighting in the mining sector “provided another positive impact on performance”.
The manager also highlights positive performance from a number of his major holdings including BAE Systems, Reckitt Benckiser and BT.
Vodafone, International Power, Hibu and Tate & Lyle were sold over the year, while the trust’s holding in BG Group was reduced.
A number of existing holdings were added to including Capita, Centrica and Rentokil. New investments were also made in Elan, G4S, Lancashire Holdings, Revolymer and Smiths.
Woodford reiterated his view from the last few months that he has become “a bit more cautious” as the UK market appears more relaxed about the risks facing the world economy and financial markets.
He says: “The environment is still very challenging in a real sense, but financial markets have been propped up by symptomatic treatment rather than by a cure of the world’s economic problems.”