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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 sectors.

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 sector.

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 3.38%.

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 deflationary influence.

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 they should.'

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