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Rated Manager Survey: Banks and mining stocks leave managers divided

The fallout from the liquidity crisis and fears over its effect on the wider global economy have led to a weakening of confidence among Citywire rated managers over the last month.

Many rated managers have relied on miners to drive their performance over the past year and 43% of respondents think mining stocks are still on reasonable valuations, while 30% believe prices are now too high.

The survey also revealed 60% of respondents felt it was too early to buy back into banks, while 36% felt valuations had fallen far enough to merit buying, with Barclays, Lloyds TSB (LLOY) and Royal Bank of Scotland (RBS) (RBSA)the most popular choices.

Aegon’s high yield bond manager Philip Milburn described miners as ‘cheap as chips’, while Wayne Buttery of Margetts Opes Growth (Margetts Opes Growth Acc)was just as bullish.

He said: ‘The world is constantly creating new natural resources, it just takes a few million years to do so. There is a plentiful but naturally dwindling resource that will be in ever increasing demand.’

Citywire’s overall confidence index, which combines managers’ views on the economy and the stockmarket, tumbled by 19% last month.

Perhaps the most bearish response came from Merrill Lynch Special situations and UK Smaller Companies (Merrill Lynch UK Smaller Companies Inc) manager Richard Plackett who said a full blown recession in the UK was ‘highly likely’ next year due to the ‘unravelling credit bubble.’

Plackett added: ‘It is premature to buy UK banks until clarity is reached on the level of write-offs and recapitalisations required.’

However, he said the mining sector still holds value providing it is ‘cash generative and has production growth.’

While financials were generally seen to be leading the markets down, miners were also highly volatile. Price surges triggered by the possible merger of majors Rio Tinto (RIO) and BHP Billiton (BLT) led some to believe a bubble could be developing in the sector.

Morley’s Norwich UK Focus manager Mervyn Douglas said miners are ‘significantly overvalued’ and managers in the sector should be looking to lock in profits.

OPM’s Tony Yousefian said: ‘Banks have been beaten up badly and it is a dangerous sector to play. However, banks with international exposure will be our favoured play.’

Conversely Majedie Asset Management’s Adam Parker said there were already ‘selective’ stocks among UK banks which have reached attractive valuations, while he remained bullish in miners.

Managers were divided on whether the UK would be hit by a recession over the next twelve months, with 20% neutral on the economies prospects for the coming 12 months.

A third of respondents believed the UK was likely to experience a recession, although 46% believed the economy would escape such a predicament.

Aegon’s Global, Investment Grade and Sterling Corporate Bond manager David Roberts believes unemployment could be a key factor next year to whether the UK enters a recession.

He said: ‘The UK has so far held up surprisingly well. However, given the extent and likely duration of the credit crunch there is a probability the numbers start to roll over and unemployment will be key.’

The stockmarket

Confidence in the stockmarket fell by 7% in November, with 46% of respondents believing trading conditions would worsen over the next year and 8% thinking conditions would improve.

Opinions on prospective returns next year were also divided. A total of 27% expected to see single-digit positive returns, while 23% anticipated single-digit negative returns and 12% were bullish enough to predict double-digit positive returns.

The valuation of the FTSE also brought a mixed response, with 35% believing it is currently fairly valued, while 38% felt it was undervalued and 19% overvalued.

The economist

Confidence in the economy fell by 35% in November, obliterating the strong rise of the previous month, when the market briefly rallied.

Andrew Milligan, head of global strategy at Standard Life Investments (SLI) said the fallout from the liquidity crisis has now spread to the wider market.

He said: ‘One could have made the argument a month ago that this was purely a financial issue but in the last few weeks managers have been forced to realise there is now a growing risk of recession in the US and other countries.’

While Milligan said it will now be hard to contain the problems stemming from sub-prime within the financial sector, he understood why the sector is dividing manager opinion on valuation grounds.

He added: ‘The banks will be debated for months to come. Some are now buying in on valuation grounds because the dividend yields on UK financials is around 6%, equivalent to cash rates.’

Milligan added the full impact of the sub-prime fallout will take at least until the summer of 2008, which is driving some of the uncertainty.

He said: ‘The debate is between managers saying valuations cannot get much worse and those saying it could be another six months before the picture is clear.

On miners Milligan reiterates they are still a good short-to-mid-term bet.

He said: ‘There is an argument that the valuations on miners have grown too far too fast but we still support them in the immediate future because of emerging market demand and the supportive backdrop of a weak dollar.’

The Citywire Rated Manager Survey was conducted between 19 and 23 November. Managers qualify for inclusion provided they run funds within the UK Corporate Bond, UK Equity & Bond Income, UK Equity Income, UK Other Bond, UK Corporate Bond, UK Smaller Companies, UK All Companies or Managed sectors. They must also have an A-rating or above for excellent risk-adjusted performance over the last three years.

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