Investors should keep an eye out for “interesting buying opportunities” in UK equities over the autumn months, Old Mutual Global Investors’ Richard Buxton suggests, as the market moves off its near-record highs.
FE Analytics data show the FTSE All Share has posted a 6.33 per cent total return over the year to date, just lagging the 7.06 per cent gain made by the MSCI AC World index. However, progress has stalled more recently.
As the chart below illustrates, both UK and global equities have been trending downwards since the start of August on the back of geopolitical concerns over the spat between the US and North Korea as well as the prospect of tighter monetary policy from the world’s central banks.
Performance of indices over 2017
Source: FE Analytics
Buxton – chief executive of Old Mutual Global Investors and manager of the £2.4bn Old Mutual UK Alpha fund – noted that the final months of the year can be challenging ones for markets as traders return from the quiet summer period and companies that promised growth would be “second half-weighted” disappoint and issue profit warnings.
That said, the manager remains confident in his outlook on the macroeconomic front. Arguing that “the world isn’t in bad shape”, he pointed out that the US economy continues to “chug along”, China is working hard to achieve a steady growth trajectory and Europe appears to be in the midst of a self-sustaining recovery.
“Here in the UK, whilst growth has been slower in the first half-year than in the second half of 2016, there are reasons why this deceleration is unlikely to worsen and activity can stay positive,” he said.
“Employment continues to grow. Given over 700,000 job vacancies, the numbers of people employed will continue to set new records. What has been missing, of course, is wage growth. Pin it on the demise of union power, more self-employed or part-time workers, immigration expanding the workforce or ‘the wrong kind of jobs’ but wages have remained subdued.
“As sterling’s fall led to the inevitable pick-up in inflation, real wages have been squeezed, which has been reflected in a deterioration in measures of consumer confidence. It is here that things may well be close to a turning point, as if inflation is near peak and begins to fade, then real wages may start to expand again, supporting consumer spending.” 
However, Buxton (pictured) added that the slowdown recently witnessed in London house price growth is likely spread more widely. As transaction volumes remain low, in theory chancellor Philip Hammond could use the autumn budget to reduce stamp duty or unveil other measures to stimulate the housing market, which would further boost economic activity.
In reality, though, the manager argued that Hammond is unlikely to do this as the government would probably prefer to keep fiscal powder dry until 2019, when it might be needed after the UK leaves the EU.
On a company level, he is also optimistic: “The half-year results season reflected the state of the world. Profits grew in most cases and the tone of commentary from the boardroom was positive, whilst mindful of all the potential headwinds visible. Companies aren’t waiting for a lead from governments but are getting on with life.”
Buxton highlighted the oil sector as being one with a positive outlook, thanks to a more stable oil price, cost-cutting by the majors and the ability to maintain dividends. He holds Royal Dutch Shell and BP in the top 10 holdings of his Old Mutual UK Alpha fund.
Likewise, mining companies have undertaken significant balance sheet repair and are seeing improved cash flows on the back of recovering commodity prices. Glencore is a major position in his portfolio.
“So, the macroeconomic backdrop is okay and corporates are in reasonable shape. The problem?” the manager asked.
“Equity markets have done well and valuations reflect much of this good news. It is easier to find stocks where valuations look up with events than unearth rafts of cheap shares.”
“Encouragingly, investors are cautious, cash levels are high and many would welcome a market correction to add to holdings,” Buxton concluded.
“I felt at the start of the year that returns may be front-end loaded in 2017 so with valuations rich, it would be no surprise if the markets provide some interesting buying opportunities through the autumn term.”
Buxton has managed the Old Mutual UK Alpha fund since December 2009, over which time it has made a 116.38 per cent total return. This puts it in the second quartile of the IA UK All Companies sector, where the average fund has made 106.04 per cent, and is ahead of the 93.98 per cent gain in the FTSE All Share.
Performance of fund vs sector and index under Buxton
Source: FE Analytics
Unlike many funds in the peer group, the portfolio is heavily weighted towards FTSE 100 names. The largest holding is HSBC, which accounts for 5 per cent of assets, while GlaxoSmithKline, Sage Group and Lloyds Banking Group are also found in its top 10.
Square Mile Investment Consulting & Research, which gives the fund an ‘AA’ rating, said: “The focus on larger capitalisation companies differentiates it from many other UK equity funds, a number of which have relied upon the recent strength of smaller and medium sized companies to outperform.
“The manager's approach is far sighted and it can take time for his ideas to be rewarded. It should be noted that the approach can lead to greater volatility than other UK equity strategies and the fund’s performance may accentuate any sharp market moves, both on the upside and the downside.”
Old Mutual UK Alpha has an ongoing charges figure (OCF) of 0.85 per cent and is yielding 2.98 per cent.