Given that the FTSE 100 index is currently trading just above 6,800, this would push the index above its record high of 6,950.6, set in late 1999. King, co-manager of the Investec Managed Growth and Investec Multi Asset Protector portfolios, says the UK economy is in good shape, and expects better-than-expected earnings growth, which will result in a strong period of performance.
“At some point in the near future we will see markets re-rate to higher levels however they would be likely to fall again after this,” he said.
“Investors should be buying now. Equities had a good month in May and we expect them to continue to have good run, with an upward trend across markets.”
“The bear market [between 1999 and 2009] is starting to fade in investors’ memories and it is quite likely that we will see a re-rating over the next 12 months that adds between 5-10 per cent to valuations.”
“Investors buying now will see earnings growth, a re-rating and they will pick up the dividends as well,” he added.
Such a view is also shared by Old Mutual’s Richard Buxton and Psigma’s Tom Becket.
Buxton is more bullish than most, predicting a 10-15 year bull market for UK equities – largely driven by a return to favour among pension funds – in an interview with FE Trustnet in March this year.
Though King thinks an all-time high will be followed with a correction, he thinks an upward trajectory for markets will last longer than a year.
“Those who buy now will make very good returns on a three year view,” he said. “There is likely to be some period of underperformance during this time but I don't think it will be in the in the next year and so now is a very good time to buy.”
He says most investors and managers are exaggerating how expensive developed markets are following a strong few years.
He commented: “The consensus out there says ‘go to sleep because nothing is going to happen in markets in the near term.’”
“A lot of investors will tell you that equities are pretty expensive having risen very strongly in the past few years and therefore should be cautious; however, I think markets are fairly valued.”
Performance of indices over 2yrs
Source: FE Analytics
“Price-to-earnings [P/E] ratios in global equities are actually low compared to historic averages.”
“To say equities are expensive now defies the lessons of history. Investors should remember we have seen two of the four worst bear markets in 110 years in the same decade. Many are naturally cautious and that suggests a valuation below the historic average.”
King says UK equity markets are stabilising as investors are increasingly concentrating on earnings, which are improving.
“There have been a lot of negative macro stories giving all sorts of reasons for investors to be worried,” he explained.
“However equity markets have stopped worrying about these events and have decided what really matters is earnings growth.”
The manager thinks much of the bearishness among fund managers has stemmed from memories of the dot com crisis and 2008 financial crisis, which saw the FTSE do very little from a total return point of view for almost a decade.
“In 2007-8 we had the biggest bear market in global equities seen since 1900,” he said. “The consequence is that investors have come out of it feeling quite scared.”
Performance of equities 2000-2010
Source: FE Analytics
“If you had invested in 2007-8 then by the time you had got to the bottom of the market you would have lost half your money.”
“The good news is that the ratio of upgrades to downgrades has been improving rapidly, recently.”
“Earnings forecasts appear to have stabilised and this coupled with reasonable valuations – and the fact markets have withstood certain downgrades – means that there is a very good chance that equities will run.”
The £357m Investec Multi Asset Protector fund, which King co-manages alongside Phillip Saunders, has been steadily increasing its exposure to equities over the past two years, Our data shows it has risen from 22.1 per cent to 55.8 per cent over the period.
