Equities 'hopelessly overpriced' but won't change unless interest rates rise says industry veteran

The equities market remains "hopelessly overpriced" and is unlikely to head for a major downward spiral until interest rates go up, according to industry veteran David Buik.

Speaking to IBTimes UK, Buik, senior commentator at Panmure Gordon, said: "Equities are hopelessly overpriced for the simple reason that there is no other alternate asset class people think it is worth investing in at the moment, and the dire returns we are getting on cash savings."

With the US economy posting a 2.9% growth in the third quarter, Buik thinks a hike in US interest rates of 25 basis points has already been priced in by the equities market. "Moving beyond that, a correction is unlikely unless another major central bank decides to raise rates.

"So hypothetically, assuming that UK inflation climbs to 5% by the autumn of 2017, and it could happen, [Bank of England governor] Mark Carney might well decide to raise rates. It is by no means a dead certainty, but investors need to factor that into their thinking."

Buik also says the average investor should not obsess about the FTSE 100 the way institutional investors do. "I see a lot of value in the FTSE 250; even if it's not an index which sees massive support from the pension funds. At Panmure Gordon, we love the health sector. I see real value in midcap biotech upstarts; they bring a breath of fresh air when contrasted with 'Big Pharma'.

"Should Hillary Clinton win the US presidential election [on 8 November], major pharmaceuticals will feel the heat, as she claims we pay too much for our medicines, and I agree with her. Clinton could opt to come down hard on these companies."

Another sector Buik fancies happens to be media and entertainment. "More and more people are getting involved in the entertainment sector, and I think there is going to be quite a lot of merger and acquisition activity."

The industry veteran also says he would keep tobacco stocks in his portfolio. "I don't believe in this nonsense about jumping on the ethical stocks bandwagon and limiting investment to those. Smoking is a personal choice. Tobacco companies offer high-yields, they are cash cows and appear to be well run."

Digressing from the equities market to the European Union referendum's aftermath, Buik, a prominent Brexiter, also said the City of London was behaving light a "petulant child throwing its toys out of the pram" in the wake of the 23 June vote that saw Brits vote 52% to 48% in favour of leaving the EU.

"Much of the City is full of Remainers rather than Brexiters, because maintaining status quo is easy and convenient. Change involves hard work which many don't want to undertake. We could break from the EU and have our own financial legislation on the lines of Dodd-Frank Act in the US.

"I think that will be one of the ways of getting around the European banking passport, dangers about the loss of which – including major banks quitting the City – is something I am fed up of listening to. Dublin, Amsterdam and Frankfurt cannot match London on several fronts, from infrastructure to a work environment, culture to accessing capital."

"In London, we have 70 years of infrastructure, we are at the centre of the financial world, we are the central time zone and English is the international language of business. That's not me being arrogant – it's a statement of fact."

Buik believes that banks could move capital clearing and some back office staff out of London, but they are unlikely to move lock, stock and barrel.

"Whether its BNP Paribas, Goldman Sachs or JP Morgan, if their staff are disenchanted because you are moving them to some part of the world they don't want to be in, the cost of doing that is huge – not just financially but emotionally – and you'll get less out of your people.

Furthermore, Europe is a mess politically, Buik said. "The very EU politicians warning the UK that there would either be a 'Hard Brexit' or no Brexit will not be there to negotiate it when the real talks begin. [French President] Francois Hollande is finished, even [German Chancellor] Angela Merkel and [EU President] Donald Tusk might not be around the negotiating table for long."

The industry veteran feels there need not be an either or choice between a hard and soft Brexit. "For starters, global trade does not start and end at the EU's doorsteps. There are 165 countries we can trade with and our beloved Commonwealth. Secondly, in the case of Brexit negotiations, the rule book might well have to be torn up when it comes to the talks, because it is in the interest of both sides to find a deal that works."