The market is gradually coming to its senses

Harbour in Dorset — The UK could be a safe haven in market turmoil

(Image credit: © Matt Cardy/Getty Images)

When things change they often change very quickly. Look at your portfolio and you will see what I mean. The growth stocks and funds that have been making you money for years have tanked: shares in Scottish Mortgage are down 28% in three months. Value stocks are soaring: BP is up 40% in six months. And the fact that the UK offers a degree of inexpensive safety is beginning to be recognised. The MSCI World index has fallen around 6% so far this year. Thanks to its cash-producing, dividend-paying miners, energy producers and banks, the MSCI UK index is up 3.6%. If this carries on, 2022 could be the first year the UK has outperformed the world since 2011.

It is hard to shake the feeling that we are witnessing a market gradually coming to it senses – recognising that it is possible to overpay even for great companies. Richard de Lisle of the De Lisle America Fund gives the example of Adobe. Its fundamental business is fantastic. It has grown its earnings by 19% a year on average for a decade and can probably continue to do so. It’s also down from $700 to $500. However, even at that price it is still on a price/earnings ratio of 50 times. Back in the early 1980s (when US inflation was last 7.5%) that kind of growth was priced at more like 20 times earnings. Adobe is a “fine name”, but right now, says de Lisle, “maybe not where you want to be” given how far the price has to fall – or the earnings rise – for the valuation to be reasonable.

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