The manager says that in the majority of defensive sectors share price rises have been driven by a flight to safety rather than any improving fundamentals.
He warns that history shows when valuations reach such extreme levels of dispersion they tend to revert, and investors should start positioning themselves for this.
“There has been an unprecedented collapse in the multiples between cyclicals, which are extremely cheap in historic terms, and defensives, which are extremely expensive,” he said.
“Over the next five years I would expect that to revert. History shows when you get valuations at these levels, it’s a good time to take the opposite view.”
“Investors have been forced to buy equities because they can’t get yields elsewhere, but they are buying short duration assets with high earnings visibility, which means any uncertainty around earnings is being punished,” he added.
“The outperformance of high dividend-paying stocks is unprecedented.”
Kirkman says that positive economic data from the US supports the view that cylicals could be due a rebound.
“We are starting to see some evidence of a cyclical recovery, particularly in the US.”
Bolko Hohaus, manager of the Lombard Odier technology fund, is another manager who expects sectors like his own technology sector to rebound, as investors are pushed up the risk scale from expensive defensives to cheaper cyclicals.
“We think the next wave could be into cyclical stocks like the technology sector,” he said. “The gains over the last months have been dominated by defensives. The sector has underperformed 14 per cent over the last 12 months.”
Kirkman says the extreme valuations are pushing him away from many defensive sectors.
“The extremes we have seen in the last year means we are sceptical of much of the other sectors like consumer staples, telcos and utilities.”
“There have been positive earnings revisions in financials and consumer discretionary but the stocks that have best gains, most of it has been driven by multiple expansion.”
The £165m JPM Global Consumer Trends fund has been a top-quartile performer in its sector over five years, returning 62.98 per cent against the 30.7 per cent of the average fund in the IMA Global sector.
The MSCI World benchmark has made just 23.67 per cent, according to data from FE Analytics.
Performance of fund versus sector and benchmark over 5yrs
Source: FE Analytics
However, the fund has underperformed the index over three years, making 35.34 per cent as the benchmark is up 44.49 per cent.
Kirkman says this is due to his overweight position in emerging markets, which he has continued to add to in a period in which they have underperformed the developed world.
His weighting to emerging markets is as high as it has been, and he says he intends to keep it high.
“We have continued to raise our weighting to emerging markets incorrectly, and that’s the reason for us failing to keep up with the index.”
Kirkman says that while he recognizes the concerns surrounding weak economic data from China, in the long-term it is the place to be, and on valuation grounds the country is the place to be.
“Structurally the reasons for being in China – urbanisation, the consumption story – remain in place.”
“As risk appetite returns to equities, I would expect valuations to recover,” he said.
Kirkman says that he is increasing his weighting to Europe, also on valuation grounds.
“The other great anomaly in the markets is the multiple differential between Europe and the US, which is approaching all-time highs.”
“It tends to be most extreme in the domestic sectors, but more than 50 per cent of European earnings are coming from outside Europe, so investing in businesses on a country basis is less relevant.”
“We prefer Europe over the US on valuation grounds.”
The manager says among defensive sectors he remains positive on the healthcare sector.
“Healthcare is a special case due to restructuring. Healthcare remains the best defensive growth story for a couple of reasons.”
“Healthcare spending globally is continuing to increase in GDP terms, and I would expect that to continue as the world goes through an aging process.”
“It remains very low in the emerging markets, and we are seeing fast growth there as countries roll out public healthcare systems and recognise the benefits to their economy of doing so.”
However, the manager, who lived in Japan for seven years and ran money there, says that he is unconvinced by the rally in that country.
“Monetisation of debt or inflation is inevitable at some point in Japan,” he said.
“Over the five years we have run this fund we have had very little invested in Japan, which has been the right decision on aggregate, but wrong over the past six months.”
“I remain sceptical about the policy changes and their long-term impact.”
“First, there’s the fact that Japan has done QE before. From 2002 to 2004 it expanded the bank balance sheet by 25 per cent of GDP, and it did have an impact on the market but dodn’t change the long-term course.”
“Secondly, we have heard “this time is different” many times. Koizumi was very popular for a while as Abe is now, but nothing changed.”