Talking Point 

Advisers go on the defensive over high valuations

Advisers go on the defensive over high valuations

Equity market valuations look overstretched according to some quarters, prompting financial advisers to move client portfolios to a risk-off position.

Philip Milton, chartered wealth manager for PJ Milton, said too much money is flowing to some of the highest income-paying equities in the UK stockmarket. 

Keen to avoid what he sees as the risk of being in a highly concentrated stock market, and due to the poor returns on fixed income, he has been moving out of high-risk bonds and equities into infrastructure investments to diversify his clients' portfolios, so lower risk and maximise income.

He said: "These will provide diversification and uncorrelated exposure away from equities to help conserve capital values as much as producing above-interest income returns for clients."

Mr Milton said he had been "concerned of late" by the fact some of the UK's biggest funds have invested heavily into companies such as AstraZeneca, which recently had a "big negative hit" after it published poor results.

"Did you know that thirty of the eighty-seven funds in the Investment Association's Income sector had Astra as a top 10 holding?

"Twenty-eight had British American Tobacco in that position. The same overpriced stocks have been chased higher, too, both by ‘cheap’ passive, index-tracking funds and exchange-traded funds, and because of the weight of money being subscribed to this sector, often by unsuspecting investors."

His comments echoed the sentiment of advisers polled by FTAdviser Talking Point, 34 per cent of whom believe equity markets are due a correction soon.

A further 28 per cent of advisers considered equity markets to be "a bit stretched" at the moment.

Only 17 per cent of respondents thought there was a distinct difference between developed markets and emerging markets, with 21 per cent claiming markets were still "good value".

Likewise, fund managers and analysts have warned investors to be canny over valuations. 

Stephanie Butcher, fund manager for Invesco Perpetual, commented: "As we have described frequently before, focus on valuation is the over-riding philosophy that informs allocations.

"To our minds over-paying for any asset, whatever its quality, is taking on additional risk."

Tanguy De Lauzon, head of capital markets & asset allocation at Morningstar Investment Management Europe, said: "The question of whether we can trust valuation metrics is a recurring theme across history that stems from the “this time it’s different” mentality.

"We know starting yields are low, growth is modest and valuations are stretched. Hence, even if valuations remain at the outer bounds of normality, the return backdrop is likely to be
lower due to the compressed starting yield.

"The alternative would be for valuations to revert, where we would see negative returns followed by something closer to normality. The point here is to acknowledge is that valuations matter regardless of the stage in the cycle."

Simoney Kyriakou is content plus editor for FTAdviser

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