Bar a wobble over the summer, the general direction of the UK market has been up for over a year.
However, some commentators have suggested that share price rises are getting ahead of earnings growth, meaning that investors are essentially paying more for the same revenue streams.
In May, a number of highly rated Aberdeen managers warned that markets were pricing in higher-than-expected earnings growth.
More recently Doug Lawson, manager of the TB Amati Smaller Companies fund, said that the mid cap area in particular had seen a large re-rating, backed up with minimal earnings growth.
However, McVeigh (pictured) says this is not a concern given the market is still recovering from distressed levels after the 2008 crash, which left banks in particular "priced for Armageddon". "It’s a re-rating – that’s clear," he said. "I think it just reflects that because of what happened in 2008, valuations are at grossly undervalued levels."
"But if earnings are stable or make some slim progress, you will continue to see valuations correcting from extreme panic levels."
McVeigh has run the £846.3m Jupiter UK Growth fund with co-manager Steve Davies since 2003.
The trust is a top-quartile performer over one-, three- and five-year periods, having beaten the FTSE All Share substantially over each time frame.
Data from FE Analytics shows that the fund has had a particularly good year, returning 40.98 per cent over 12 months, more than double the 19.42 per cent made by the index.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
The fund is now reaping the benefits of buying stocks a few years ago at cheap prices when the rest of the market was turning its nose up at them.
"One of our best holdings has been Howden. After we bought it it went from 70p to a low of 20p and we topped up; it’s now at 240p," McVeigh said.
"It’s a solid business that had issues but we never thought the business wouldn’t survive, as the share price suggested."
McVeigh says he looks at enterprise value to EBIT, which measures earnings as a percentage of total value of all debt and equity, pre-tax.
He says stocks he holds look very cheap on this metric, often trading on around 11x EV to EBIT.
This means that there is still room for substantial market gains in the coming years, he explains: "We still think there has been a general risk-aversion and we see this in two ways."
"First, with regard to equities as an asset class, lots of people have preferred to buy low-risk absolute return stuff."
"Secondly, within equity markets, because of investors being nervous they are buying safe stocks at high valuations rather than the stuff at especially low valuations."
"GKN is one example: a year ago the share price was 200p and earnings forecast 30p. Their shares are now at 360p and earnings forecasts haven’t really changed."
The area that was most over-sold was the banks, McVeigh explains, with Lloyds in particular priced for Armageddon.
McVeigh bought into Lloyds at 45p when he thought the general direction of travel was reasonably clear, whatever the market thought. The retail banks were always going to be central to the UK economy, the manager said.
"People were valuing bank stocks as if everything had to be liquidated in severe distress," he said.
McVeigh adds that the models used to measure Lloyds' viability were priced as if the whole of "UK PLC" was bust.
"They were then at 26p but could probably make 8p earnings a share and if it pays out eventually in a couple of years 75 per cent of that, it could even be more."
"We are investors and we deal on the balance of probabilities, not in certainties. We can still see reasons why Lloyds can get to around £1 [it is currently at 77p]."
"I think there’s been a strange transformation. Investors went into the banking crisis when banks were trading on 2x book and low levels of capital and everybody was relaxed about it."
"Now they have trimmed down their balance sheets and raised their capital ratios and people say you cannot believe anything they say."
"On a Basle III basis, RBS went in with a Basel III capital ratio of 2 per cent and now it is at 8 per cent. In a couple of years it will be 9 per cent, so you can see how far the banks have come."
Lloyds is the biggest position in the fund, thanks to a boom in its share price that has seen it grow 141.97 per cent over one year, according to data from FE Analytics.
Performance of bank stocks over 1yr
Source: FE Analytics
The bank makes up 8.2 per cent of the fund. Barclays makes up another 5.4 per cent and HSBC 4.7 per cent. The fund also holds RBS outside its top-10.
With regard to Barclays, McVeigh says it also has plenty of potential to re-rate.
"It trades at a decent discount. Its share price was at 85p and we think it could go to £4, so we think it’s a good business on a good discount to book."
"The UK market trades on 2x book so if you are trading on 25 per cent less than the book, you have got a discount to the market."
"We felt that Barclays was in the centre of the regulatory storm and that’s now been addressed."
McVeigh says that he expects the share price to truly come good in 2015, so investors will need to be patient with this one, but considering it trades on 280p and his price target is £4, it could be worth the wait.
HSBC is reinventing itself, the manager says: "We felt that that was a business that in the last 10 years had the wrong strategy."
"If they had used their financial clout in Asia at the bottom of the financial crisis they would have had the most amazing business, but they decided to come out of fast-growing Asia and refocus on the slower-growing developed world, where they are in a weaker position."
"Now we think there’s better management in place and they have recognised the strategy of the 1990s was wrong. If you wanted to write a PhD on dis-economies of scale, HSBC would have been the place to start."
The manager says that there is even plenty of value in majority state-owned RBS.
"Stephen Hester did a very good job in turning around that business. The share price is 320p and it is on a 30 per cent discount to book value and we come back to the point that they have spent the last four years writing off an enormous chunk of their balance sheet, so that figure is reasonably reliable."
Jupiter UK Growth has ongoing charges of 1.79 per cent.
