‘During the last 12 months we have seen share prices rise substantially further than underlying corporate earnings in the UK and US, as ultra-supportive monetary policy has pushed up asset values,’ they wrote to investors in their latest monthly update.
‘With margins on the high side by historical standards, this forms a potent cocktail which greatly increases the likelihood of hitting potholes of stock-specific disappointment.’
So far this year several prominent companies around the world – including Rolls-Royce in the UK, Target in the US, and Nintendo in Japan – have issued surprise profit warnings.
However, Baillie and Russell (pictured) noted that monetary policy remained supportive overall and so they have not cut their weighting to equities. Instead, they have focused on companies with lowly valuations.
‘This in no way means that we are immune from stock-specific disappointments but cheaper valuations may provide some insulation,’ the pair argued. ‘Earnings can still fall but multiples are less likely to contract to the same extent as the highly rated defensives.’
With this in mind, the Ruffer duo highlighted three firms that ‘look interesting in this context’: IBM, which trades on 12 times its earnings after its shares have fallen by 11% over the past year; Volkswagen on 10 times earnings after an 11% share price rise over the past 12 months; and Cape on 13 times earnings after a 7.5% share price appreciation since last March.
Ruffer itself posted a flat net asset value performance in February, while the FTSE All Share gained 5.2%.