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Are shares still good value?

After such strong equity market gains, it is time to consider reducing exposure, writes Mike Deverell of Equilibrium Asset Management.

Are shares still good value?

‘Be fearful when others are greedy and greedy when others are fearful.’

This quote from Warren Buffett sums up the contrarian approach to investing. To ensure you buy low and sell high, you must think about buying when others are selling and selling when they’re buying.

Markets are generally at their lowest when sentiment is at its worst. By contrast, they peak when sentiment is at its highest. Market sentiment appears to be verging on the euphoric right now. This makes me worry.

After ending 2012 at 5,897, the FTSE 100 climbed to 6,347 by close on 1 February, an increase of over 400 points or more than 7.5% in a single month.

At Equilibrium, we have been overweight equities for some time and positive on this asset class. After such a strong rise, now is the time for us to re-test our assumptions and decide if we need to reduce exposure and bank some gains, or keep enjoying the ride.


In my previous Citywire articles, one constant theme I’ve returned to is valuation. How cheap does the equity market look based on earnings and dividends, for example? Is the valuation argument still so compelling as it was a few months ago, or should we be looking to reduce equities?

Looking at the UK market overall, the price/earnings (p/e) ratio is now around 13.2. This is based on historic earnings, those reported by UK companies over the past twelve months. A p/e ratio is simply the price of a share divided by its ‘Earnings per Share’. The lower the ratio, the (potentially) cheaper the stock or market.

On this basis, the UK market is trading slightly below its long term average of around 14. If earnings remained the same, the market would have to rise around 6% to revert to average.

Looking at other markets, both Europe and the US are now trading marginally above their respective long term averages on an historic p/e basis – they are therefore potentially overvalued.


Of course this ignores one crucial factor – earnings growth. We can also look at the p/e based on predicted earnings, known as the forward p/e. On this basis, the major markets are somewhere between 12% and 17% below their long term averages, provided those earnings forecasts are met.

That, of course, is a big ‘if’.

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31 comments so far. Why not have your say?

joe stalin

Feb 11, 2013 at 15:47

oh dear not another one! where is he going to put his profits? cash? Bonds? This is going to be a stock pickers market just like it as been. we have had one after the other offering the same advice at regular intervals since the spring of 2009. macro fundementals are only just improving and interest rates while likely to rise from current levels in real trems will likely remain low. Cbutonstruction financials is where the money is likely to go peraps coming out of defensives as China has avoided the hard landing all and sundry were predicting who know we might even get a little blip from the miners. Sure we might get a pull back but given the amount of money that has stayed on the sidelines worried about the various armageddon scenarios that never materialised it is unlikely to be a major one as lazy underperforming funds are forced to make money for their clients in order to justify their bloated fees

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Feb 11, 2013 at 16:25

All this talk about switching investments around seems to ignore a number of factors, CGT and its fixed limits, the costs of selling and buying and the risk of switching in a very turbulent market, with many dark clouds still on the horizon.

Anyone with a reasonably substantial portfolio will be limited to tweaking his/ her portfolio (unless done within a SIPP when the only benefit is no CGT liability), unless you are twinning a loser with a winner, and why would you want to sell a winner?

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Feb 11, 2013 at 16:32

OOPS, posted before I had finished.

The conclusion is that most dealings are going to benefit the exchequer, as they take a slice of the action, and that the CGT limit is artificially low, not taking account of the galloping inflation created by QE, particularly for us 'old farts'. QE is good for the govt budget because and decent company will have its assets rerated to keep pace with the devalued currency and consequently rise in "value", when all it has done is to tread water.

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joe stalin

Feb 11, 2013 at 16:37

you could net the two off of course more often than not today's stinkers will ecome tomorrow's winners (if the management don't leg the investors over like Game and Cattles for example)

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Tony Peterson

Feb 11, 2013 at 17:31

Snoekie has raised a point which cannot be stressed enough. If shares just "tread water" after allowing for inflation, and you have to sell more than your annual CGT allowance, then you will be taxed on inflation...

For me this just underlines how important it is to use up as near as you can get to your full CGT exempt limit each year. And February March is the time to do it.

Of course, shares in ISAs do not hang under this particular Damoclean sword.

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Feb 11, 2013 at 17:56

Shares up and according to the bbc news "Business confidence hits new low". So my reckoning is that the BoE printing hundreds of billions of pounds for QE has caused monetary inflation and this inflation is the main cause of the current share price gain.

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gggggg hjhjkl;'

Feb 11, 2013 at 18:11

Snoekie -" (unless done within a SIPP when the only benefit is no CGT liability),"

No it is not!! There are also income benefits ( as there are with ISAs). Income on these does not need to be declared for income tax purposes and therefore benefits the rate of income tax paid.

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Feb 11, 2013 at 21:42

gggggg, if you leave it in the SIPP account. but for those on drawdown, the amount drawn down is aggregated with your other income, and I still haven't quite worked out if I need an R185 for the tax man.

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Geoff Renshaw

Feb 11, 2013 at 22:56

Jonathan has got it right, I think. The Bank of England has bought about one-third of the entire stock of government debt, using newly-printed money. The people who have sold that debt to the Bank have got to do something with the money. What else but to put it into equities?

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Lawrence Sautter, Chartered MCSI

Feb 13, 2013 at 11:07

No worries, Mike Deverell is only rebalancing a balanced fund after a great and fast equity market. Taking money off the table, while still enjoying the bullish mood is never a bad thing. However, this is only tactical rebalancing. What really matters over time is your return after tax and inflation. Managing inflation risks should be the core component of your portfolio modeling and construction process. Think about hedging your inflation risk and do not waste time on tactical switching, when marktes are more or less neutral valuationwise. Historical analysis indicates that all asset classes have beaten inflation over periods longer than 10 years, but no single strategy will work in all scenarios over shorter time horizons. So your time horizon is key to your strategy. Investors close to retirement, should begin to factor inflation risk into their portfolio at least 10 years before any liquidity is required from the fund. If you are worried about inflation and your horizon is 5 to 10 years long, you have to stick with a well balanced fund/portfolio that invests in equities, commodities, REITS, TIPS, agriculture, infrastructure, energy, natural resources, renewables, timber,direct real estate and even bonds. The right mix makes the perfect hedge for the right inflation scenario you pick. If you have a shorter term horizon and want to take more risk, looking for equity ideas concerning global stocks, follow me on twitter: at sautterlas65

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Feb 16, 2013 at 09:46

My net income from my portfolio built up over 40 years is running at 12.5% of base cost and provides me with an excellent retirement.

Why sell?

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Feb 16, 2013 at 11:37

here's an idea whose time might have come because of the lack of investment opportunities to spend cash on.

utilty companies, supermarket companies, local authorities etc take the cash by "selling" the forward value of their goods/services so that investors can preserve purchasing power for the key components of their expenditure in retirement.

an investor can "protect" against rising costs in these non-discretionary components of their outgoings and replace the total rip-off that is an annuity, avoid paying for bills out of net income and essentially not worry, ever, about a minimum standard of living. (a feature that annuities can't offer" since they are taxable and lock in an average of someone else's vague definition of inflation).

by wa\y of an example, an investor could pay a fixed capital sum today to a local authority for an upfront payment of, say, £20,000 that locks in current levels of rates, or a supermarket/utility could sell the pesent value of a grocery basket/supply of water.

this idea is formative (not fully worked through) but I thought I would slip it in as a home for cash that kicks out annuities and increases relevance to the investor, whilst at the same time, providing capital for (governments) local authorities and companies to pay down debt.

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John Osborne

Feb 16, 2013 at 12:07

Yes, CGT has become one of the worst stealth taxes of all for savers, particularly long term savers (outside an ISA of course).

Indexation allowance was completely fair, but that was craftily changed to taper relief by Gordon Brown, and even that diluted benefit has been scrapped now.

CGT should be called "compounded inflation tax", particularly after the effects of QE.

Personally I think it is immoral for governments to in effect tax savings already tax-paid on inflation they create through their own incompetence and political dogma.

But where does that leave us? Long term shareholdings without housekeeping buying and selling? Selling good companies at the bottom just to offset CGT? Continual tax calculations to minimise "inflation tax" CGT? A complete disincentive to invest directly and properly in our own industry.

I find myself drifting more and more towards investment trusts long term and letting them do the buying and selling, despite the hidden fees and advantages and opportunities of selecting and holding individual companies. Particularly when other areas of the world are more attractive than UK unfortunately.

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John Osborne

Feb 16, 2013 at 12:18


Both BT and Talktalk are offering a good discount for paying for the line rental in advance, and this seems a good deal.

Can you give other examples of Utilities offering their services at an attractive rate for up front payments?

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Feb 16, 2013 at 13:04

no I can't..sorry..hopefully it catches on. seems to suit all debt laden entities supplying consumers and beats coupons/vouchers and annuities hands down.

you can do this via proxy by buying shares in most companies so that the dividends pay the bills.

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Tony Peterson

Feb 16, 2013 at 13:36

With the exception of the local authority, every outfit that send me bills in my retirement pays me more in dividends than I need to pay them.

It does far more to create a comfortable feeling of security than any pension does.

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Feb 16, 2013 at 13:44 previous idea is intended to save more money for pensioners than dividends and provide debt issuers with a (one-off) opportunity to reduce debt

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John Osborne

Feb 16, 2013 at 14:15


. . . but how long will these juicy inflation beating dividends continue? Governments may increasingly look on Utility profits as a cash cow. Particularly when a good proportion of their monopoly profits are going overseas.

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Tony Peterson

Feb 16, 2013 at 16:17


I cannot tell you what the future holds. I live, very happily, in the present. I do not fret over what governments may do. They may, equally well, look benignly on utility profits, thinking that the pension funds, which are the main beneficiaries, thanks to their tax concessions, will perhaps do so well that they can one day pull the plug on the state retirement pension. Voila. Deficit defunct.

An asteroid might strike. A cash cow might become a fodder demanding horse. (We are all burgered in the end). Who knows? Who cares?

But if every company that bills you sends you more than ten times what they want from you, I think you have a recipe for a happy retirement.

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John Osborne

Feb 16, 2013 at 18:33

Tony, Thanks, you are right, I was being a little pessimistic, and have to admit am of the benefit of (so far) increasing income from shares in SSE which goes a long way towards our electricity bill.

If the pension funds had invested more in the better blue chips like they used to, then they would still be getting a growing income like yourself and might not have such huge deficits. With the benefit of hindsight, the siren calls making them invest in "matching assets" at the bottom of the market did a lot of harm.

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Anonymous 1 needed this 'off the record'

Feb 18, 2013 at 09:06

I don't see the point in having a 50% allocation to stocks and then claiming you're diversified. This actually means the bulk of your beta risk comes from stocks. Undiversified that really what clients need?

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John Osborne

Feb 18, 2013 at 10:54

returning to the article. . .

In my opinion this kind of technotalk is typical of the fund management industry and appears to ignore one of the best parts of investing: investing for a long time in good Companies for growth or dividends, ignoring market noise.

Also, do Equilibrium really think they can forecast and beat the "markets" (whatever they are) by short term asset allocation changes, rather than by sector and country allocations?

To me a 50% allocation to equities (not specified) and pointless churning means extra fees, wasted opportunity and under-performance somewhere, whatever the western market graphs, RSIs, bull bear indicators etc. say.

Of course, when there are the inevitable crashes, then they may be proved right temporarily, and am sure their clients are impressed by their risk analysis and control.

It would be interesting to compare Equilibriums performance with a run of the mill high performer (and high fee charger for its size) like Invesco Perpetual Income OEIC.

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Anonymous 1 needed this 'off the record'

Feb 18, 2013 at 11:08

I'm with John Osborne on this one.....however I would add that whilst someone like Neil Woodford has a respectable record over a long period, I think people get a bit carried away with long only fund managers like him simply because he's beaten the benchmark consistently. Over his 25 year carer he annualises maybe 9.5% with some considerable drawdowns along the way (maybe 40-50% at a guess)....again not bad over such a long period but I can name you quite a few other managers who have bettered this (i.e. double the CAGR with similar drawdowns) over the same period and have considerably less assets under management. The only difference is that they are not traditional equity fund managers which suggests to me that people tolerate equity market volatility because they believe they understand it whereas they ignore other strategies that are seemingly esoteric or less mainstream

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Mike Deverell

Feb 19, 2013 at 09:35

Thanks to everyone for their comments. There's a couple I'd like to respond to...

Anonymous 1 - regarding having 50% in equities... firstly, that's just an example and depending on the client we could have more or less than this amount.

However, a 50% equity position does not mean a beta of 0.5 (or 50% correlation to the equity market). It depends what you hold in the other 50%. If you have lowly correlated or even negatively correlated assets then your beta can be even lower.

John Osbourne - nobody is saying you can accurately forecast or time markets. However, it is a historical fact that markets are likely to produce better returns when starting with a low PE ratio, than when the PE ratio is high. If you have a diversified portfolio of assets then you should be able to enhance risk adjusted returns by increasing equity exposure when markets are low and decreasing when they are high.

We don't charge fees or take commission for switching or rebalancing portfolio, so I must take exception at your "churning" comment. We would only change portfolios if it is in the interest of our clients – it takes a lot of work to do it!

We like Neil Woodford’s approach and hold his fund in our portfolio. However, it would be totally inappropriate to put 100% of our assets into equity. As Anonymous 1 points out, even Woodford has seen losses approaching 40% in the past. A proper mix of assets should never see losses of anything approaching this magnitude.

We would never compare ourselves to Woodford as we're trying to do something completely different. We're not aiming to beat a specific index or benchmark, just provide what our clients want - consistent above inflation returns.

Sorry if the article came across as "technospeak"! The aim is to get readers thinking and debating important issues, and hopefully help them to make investment decisions.

Mike Deverell (author of the article)

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Anonymous 1 needed this 'off the record'

Feb 19, 2013 at 10:23

Beta of 0.5 implies 50% volatility, not correlation but I'll let you off with that one.

"If you have a diversified portfolio of assets then you should be able to enhance risk adjusted returns by increasing equity exposure when markets are low and decreasing when they are high."

Well this is obvious. The only problem with this is that you can't possibly know for sure that markets are low or high without the benefit of hindsight. Your argument to this would be that you use PE to define if something is low or high and there is some truth to this however PE unfortunately has two variables. Take two car manufacturers; Renault and Peugeot. Renault currently has a PE of 6 whereas Peugeot has a PE of 0.04 basically because it looks like it's going bust. So by your reckoning, you would be heavily long Peugeot because it's "cheap".

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Mike Deverell

Feb 19, 2013 at 10:46

Thanks Anonymous.

Regarding PE ratios, I am talking about market returns, not individual stocks. You are right that you can't do this with individual stocks as there are plenty of other factors to take into account.

However, it is a matter of historical fact that the return on the market has generally been better when starting with a low PE ratio. I've written a few articles about this on Citywire and in them you can see the historic research. Have a look at "understand risk, price and time" (linked above) and you can see charts showing the high correlation between the PE ratio of the market and the return over the next few years.

This is a simple strategy that anyone can do. It's not complex and it's backed up by historical fact.

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Anonymous 1 needed this 'off the record'

Feb 19, 2013 at 11:03

Fair enough, if that works for you then why not carry on!

Surely then (if you like theories backed up by historical fact) you should also invest based on momentum. Everyone is always saying "buy low, sell high" but there is also very strong evidence to suggest that buying strength (ie buy high, sell higher) and selling weakness is a successful strategy in the long term. A number of the most successful investors employ a trend-following approach simply to take advantage of many of the behavioural biases that exist amongst most market participants.

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John Osborne

Feb 19, 2013 at 12:05


Please accept my apology, I did not mean to use "churning" in the meaning of your making deliberate changes to portfolios at clients expense, only that in my opinion the 50% allocation to some equities, particularly when rebalancing only a small 5%, seemed unnecessary and a wasted opportunity.

Appreciate your 50% and 5% was only an example, generally a lot of the changes in "balanced" portfolios have been too little too late and miss the recovery movements in sectors which are difficult to forecast purely by overall market valuations, with the resulting effect on performance.

I do understand that risk analysis and control has to be done, and many clients portfolios and situations are not suitable for the volatility of equity markets.

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Feb 19, 2013 at 13:32

Mike Deverell

re: "it's backed up by historical fact"

There was a turkey who calculated by historical fact that he would get fed every day. He stayed in his hut every day and didn't even want to try to get away but then 2 months after he made this calculation bsed one fact he woke up went to get his food but someone grabbed him round the neck and chopped his head off, it was 24th December.

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Anonymous 1 needed this 'off the record'

Feb 20, 2013 at 14:01

Great analogy it:

From a good book I read: "How many reports have you seen issued extolling the benefits of buying-and holding stocks for the past century in The Netherlands, Germany, Belgium, Hungary, Argentina, Egypt, Denmark, Hong Kong, Turkey, Portugal, Spain, Mexico, Russia, Brazil, Chile, Korea, Japan, Austria and Poland? The answer? …None. And that’s for one simple reason. All of those countries had stock exchanges at the beginning of the 1900s and all of them provided opportunities for people to buy stock for the long run, but all of them suffered major interruptions in their activity due to nationalizations or war."

Relying on history is not robust in the long term. History rhymes but it never repeats

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Lawrence Sautter, Chartered MCSI

Feb 21, 2013 at 14:18

Very true, history is not robust in the long term. History is history. And the future is the future, right? Unfortunatelly nobody has a cristalball and this is exactly the reason to be well diversified over time. Keep your core investments well diversified and keep your liquid and illiquid portfolio well balanced. Do not sell your quality dividend stocks, if you have no reason to do so. Volatility is part of the game. You can allways sell the index short or buy a put on the index, if you want to hedge and/or get some alpha through stock-picking. You can even follow a zero-beta strategy if you want to play hedge-fund manager. However, do not forget your principle investment strategey and always keep the focus.

Do not care about market noise and review your strategy every 4 months.

Do remember, performance is measured after tax and inflation. With how much volatility/risk is your choice, however, black swans are not that rare, how we had to learn lately. We sometimes underestimate the risks out there. So hedge your bets and stick to your strategy.

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