The British stockmarket is providing a once-in-a-decade investment opportunity, according to Bill Mott, manager of the PSigma Income fund.
The alternative, says Mott, is that the economy and equities are heading for a severe downturn akin to those in the early 1930s and mid-1970s.
“We do not agree with the Armageddon scenario and therefore believe that UK equities offer a tremendous opportunity to investors,” says Mott, who has 90 stocks in his portfolio. “These opportunities are broadly spread across the stockmarket.”
Mott’s bullishness is based on the fact that many stocks are offering yields greater than the yield on 10-year government bonds.
He adds that the stockmarket is priced for a recession, but says British economic growth will slow rather than the economy contracting.
Mott says the economy will be boosted by the Bank of England continuing to cut interest rates this year. “The Bank will not be constrained by inflation.
“The inflationary pressures are external, such as energy and food prices, rather than from within the UK. Consumer demand is suppressed, wage growth is not high and employment is under pressure.”
Higher energy and food prices may push up wage inflation this year. But Mott says this will be offset by the decline in interest rates, which will reduce mortgage payments.
Mott says the more sharply the Bank reduces interest rates, the more short-lived the opportunity to invest in equities at current valuations will be.
There are four banks in Mott’s top 10 holdings, though he is bullish about the ability of banks to maintain their dividend yields.
He points out that when Bradford & Bingley issued its results last Wednesday, its share price fell 13% in the morning. However, its dividend rose 5% and its yield reached 9%. In contrast, 10-year government bonds are yielding about 4.6%.
Mott says house builders, pub operators and parts of the media sector also offer attractive valuations.
“John Hutson, chief executive of Wetherspoons, spent £5m of his own money on shares, yet the share price still fell 15%,” says Mott.
“Yet people will continue to buy pints and food in pubs, even if the economy slows.”