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“We’ve tackled some problems but still face some more that are just a little way down the road,” Richard Buxton, Head of UK Equities at Schroders kicked off his presentation at the Morningstar Investment Conference. The UK’s not doing too badly, he said, it’s taking its fiscal medicine. Buxton doesn’t think we’ll suffer stagflation in the UK but instead he’s coined the term “slug-flation” to reflect that he believes we’ll suffer an incredibly sluggish recovery accompanied by inflation.
“I think the UK’s going to be ok,” he said, as he showed delegates a chart of new business formation, which he says defies the doomsters, as it’s been relatively stable and is now even picking up slightly.
Regarding the EU, though Europe keeps buying itself more time in dealing with its fiscal crisis, the reality of debt restructuring remains distant on the horizon, Buxton believes. “For me this is the slowest motion train wreck ever,” said, adding that we could even still be standing here talking about it in 10 years.”
Meanwhile, the US is enjoying its reserve currency status, “but when on Earth are they going to start fiscal retrenchment?” Buxton says he doesn’t think the US needs QE3 but by no means does that mean it’s impossible that we it ends up opting to have it, he notes.
Not enough debt has been written off, Buxton says, which means investor fears are ‘built on sand’. And yet you can throw all this bad news at the market and it just keeps bouncing back, he notes. Overall, however, companies are in pretty good shape, from Buxton’s point of view.
Buxton’s base scenario remains one of a slow, muddle-through recover in which corporate sector spending is still key. Companies are certainly in the position to spend, he notes, and this is underpinning the equity markets.
Having said all this, there’s still a lot of cash on the sidelines, Buxton believes, and it was only around November 2010 when assets started flowing back into UK equities and there’s still been relatively low inflows since then, so plenty of opportunity remains on the table. Valuations remain extremely important of equities, Buxton says. “For me the main ‘black swan’ out there is sovereign defaults,” he says, noting that it’s the main thing that keeps him up at night..
“Sometimes I have to remind myself working in this role, why I bother,” Buxton quips, “Equities have gone nowhere for 10 years!” But returns are very cyclical, he adds, there are extended periods of great returns and of no returns—equity enthusiasm comes and goes.
The key is what your starting valuation is, Buxton points out. Against all those issues that he’s already mentioned, Buxton says one must remember that a lot of it is already priced in. “I feel sure that if you were to buy a load of equities, shut them in a cupboard and come back in 10 years time, you will have made some money,” he tells his audience.
Equities have derated hugely and sentiment is very negative, he says, adding that what money does go into equities seems to go internationally and, in addition, there’s obviously a lot of money flowing to commodities. Furthermore, there’s a significant derating opportunity as government shrinks, Buxton believes.
Regarding his current Schroder UK Alpha Plus portfolio, Buxton highlights a few favoured sectors. The market has yet again called the peak on the miners and said supernormal profits in the miner sector have to come down, but Buxton sees another 2-3 years of supernormal profits in mining stocks.
In banks, Buxton sees a long and painful road to recovery, but even within this he believes a 15% return on equity is still attainable.
For growth stocks, certainty and consistency will drive the rerating, Buxton says, while highlighting Experian, Burberry, and Roll-Royce.
Turning to self-help recovery stocks, Buxton is backing new managements, Misys, Logica, Tate & Lyle, Reed Elsevier among them.
And for UK domestic consumer stocks—“the untouchables”—Buxton is interested to note that these are starting to outperform. “On 6-7x earnings, people seem to be pricing in a substantial earnings downgrade but that’s just not happening,” Buxton exclaimed, “so there’s plenty of upside.” Buxton has recently been building his position in Debenhams, and also holds Next, Home Retail Group and Taylor Wimpey.
“We’re a long way from a normal environment, and it’s not going to be normal for a number of years, but it’s all about the starting valuation,” he concluded.
