Yet the market still has lots of factors driving it which are fairly favorable and outweigh the negative drivers, according to Paul Mumford, senior investment manager at Cavendish Asset Management.
“As far as the market is concerned, we’ve had an initial re-rating. I can’t imagine the index will race ahead from this point. It may stabilize or it may even come back a little. It doesn’t always move in a straight line,” he said in a phone call with CNBC on Thursday.
However, given current yields, equities – with their dividends and capital growth potential – will continue to look attractive versus other mainstream alternatives for investors such as pension funds, who always have new funds to invest, he added.
“The inflation trend will be a more important factor ahead. If inflation is at 2.7 percent and gilt yields fairly low with the 10-year currently hovering around 1 percent, equities will be more attractive than bonds even at current index levels,” Mumford asserted.
Rather than looking at the index as a whole, now could be the time to go back to company fundamentals, says Tom Moore, investment director for U.K. equities at Standard Life Investments.
Moore notes that a quarter of FTSE 100 companies now trade on a price-to-earnings multiple of above 20x, affirming, “That’s not a great starting point for an investment.”
Yet another quarter of the index’s constituents now trade below 12x, Moore told CNBC’s Squawk Box on Thursday, saying within that universe there are stocks generating lots of cash and paying out lots of dividends.
“There’s momentum in this market so people want whatever is hot. At the moment, in the U.K.…the industrial stocks are falling quite dramatically on a risk-off day like yesterday. Those stocks are trading on 20x…They have cyclical earnings that at some point will fall. That’s not a great combination,” he opined.
“Go back to the basics of the business models. These business models may not be sexy…these are not high growth stocks but they are churning out cash, they’ve got great market positions and they have a really sticky customer base,” Moore advised.