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Large cap stocks today's asset of choice

Tuesday 13 November 2007 09:13AM

Those present at the meeting included Edward Bonham Carter, Jupiter's CEO, Tony Nutt, manager of its £4bn income fund, Ian McVeigh, who runs the Jupiter Growth fund, and John Chatfeild-Roberts, head of its fund of funds team. The meeting was off-the-record, so opinions could not be directly attributed to individuals. Jupiter does not have a house view, and its managers are free to disagree with each other (as they did, vehemently, on one big issue). 

These are the things that I took away from the meeting:

• This does not look to be a good time to be taking a big bet against UK equities. The corporate sector remains generally in good shape, with strong profitability, balance sheets in good shape and dividend cover at its highest level in the last 20 years. Large cap stocks in particular look like a strong haven and probably the asset of choice in today's fractious markets. Looking back, the derating of equities in the face of steadily rising profits since 2002 has been remarkable.
• The bond market does not look attractive, especially at the long end of the interest rate curve. As we all know, the Fed appears to be caught in a nasty dilemma, worried about inflationary pressures, in part induced by the weaker dollar, but also under strong pressure itself to cut interest rates to stave off a credit-induced slowdown.
• Thanks in part to the crisis of confidence that is swilling around the banking sector, the market is currently providing an opportunity to acquire high yielding assets on a scale that has not been seen for two decades. The UK banks are probably not in too bad shape overall, although individual banks may well be, but it will take time for wider debt issues to be resolved. 
• One of Jupiter's fund managers has finally started to buy into the pharmaceutical sector after owning nothing there for the best part of 12 years. AstraZeneca, on a p/e relative of 12 trimes and a 4% yield, appears to have little downside, based on a reasonable product pipeline. Oil, telecoms and pharma stocks all have strong free cash flow.
• The biggest disagreement between the fund managers is over the outlook for mining stocks.  The bear case rests on the fact that none of the big miners are meeting consensus earnings forecasts in the face of fast-rising costs. On the other hand XStrata remains the biggest holding of Ian McVeigh, the growth fund manager. Getting this call right will have a big bearing  on future performance for all investors.

While these views all seem sensible to me, and indeed confirm my own gut feeling, the biggest concern in the short term, as I said earlier, is the deteriorating technical action of the US stock market. If both the Dow and the Transport index break through their August lows (the Transport index has already done so, and the Dow is close to doing), it could lead to a further downleg in the market.  

For that reason investors would be wise to maintain a reasonable level of cash in their portfolios pending greater clarity about the way the market is likely to develop. This is not the time to take an all or nothing bet on the market, given rising volatility and the unusually polarised state of expert opinion (greater than I can remember for a long time). 

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