29 Jan, 2008
Published: 07:00 Tuesday 29 January 2008
By: Nicholas Paler, Investment Reporter
Contrarian fund manager Bill Mott expects
banks to honour their dividend payments and has he also started
dipping into the beleaguered property, housebuilding and retail
Mott told Citywire: The market is discounting significant cuts in
bank dividends, but I don't think there will be any dividend cuts
in this reporting season or in the next 18 months from banks, and
the worst that will happen will be that one or two may have to
raise extra capital.'
Mott continues to stand by his overweight stance on embattled banks
for his PSigma Asset Management's Income fund, which launched
in March 2007, and expects decreasing interest rates to give the
sector a boost.
'Financials generally should benefit from a falling interest rate
environment, and domestic cyclicals will be stunningly cheap as
long as central banks handle the economy sensibly,' he said.
In order to manage risk more effectively Mott has spread out his
weighting in financials, with no one stock representing more than
2% above its relative index weighting. He is supporting nearly all
major financials apart from Northern Rock, whose future he said
remains too uncertain.
Not surprising his performance has been hit by his exposure to the
According to Lipper, in the nine months to the end of December Mott
has lost 5.92% on his fund versus a peer group average loss of
But Mott believes banks have been too heavily devalued. 'Banks are
vital to the economy and central bank policy has always been to
help banks in times of trouble, and although there has been bad
news banks have been overly discounted,' he said.
Mott has also been finding opportunities in the retailers, property
and housebuilding sectors - which have been battered by the credit
crunch - for his 90 stock fund.
Firms he has recently bought into include Marks & Spencer,
Bovis Homes and British Land.
'Six months ago we thought financials offered deep value, and while
that's still the case we have diluted that a bit as now there are a
lot of opportunities in other areas including some retailers,
property companies, house builders and manufacturers,' he said.
On the bigger macro picture Mott expects the developed world to
pass on inflationary pressures to the developing world.
He argued the global deflationary environment which previously
existed was now at an end as emerging markets were no longer a
This, he said, has left developed world economies with a choice
between slowing their own growth or passing the buck onto emerging
markets in the form of inflation. Mott does not expect the
developed nations to take the former option.
'Countries like the US won't go for that and will shift the pain
onto emerging markets, and I believe UK and European central banks
need to follow suit, meaning inflation will become more of an issue
which emerging markets will have to cope with by tightening their
own policies or unpegging their currencies from the dollar.'
He also said developed economies had the ability to reduce rates at
present as inflation was being driven by external inflationary
pressures, not internal ones.
'The driver of inflation at present is global demand, so central
banks should ignore inflation targets at the moment as we are in an
Alice in Wonderland scenario where loosening of monetary policy
will not instigate higher inflation and will instead make people
less likely to demand higher wages.'
However, Mott did concede that there was an outside chance central
banks would mis-handle the situation, resulting in what he
described as the 'Armageddon' scenario, meaning investors needed to
take a long term view.
'Of course there is a risk that once or twice a century you get an
Armageddon scenario, which would be caused in this case by
mismanagement of the global economy, and that's why I'm saying
there are stocks offering sensational opportunities on a five-year
view,' he added.
'Hopefully there will be opportunities on a five-month view as well
but I can't be certain the players in this saga will act in the way