Ignis: Beware false dawns over the coming months, warns Clark

Investors should not to read too much into low valuations and market rallies during the coming months, warns David Clark, manager of the Ignis Asset Management UK Smaller Companies Fund. Clark, whose fund has outperformed the sector average over one, three and five years, says there is likely to be a number of rallies over the spring and summer months as markets take heart from the efforts to stimulate the flagging economy. However, he believes these fillips will be ‘brief and illusory' and could leave over-eager investors nursing further losses.

Expecting March's reporting season to be a particularly ‘grim' time for markets, with companies likely to significantly undershoot analysts' earnings forecasts, Clark believes that investors are unlikely to see evidence of a sustained recovery until much later in the year.

"There seems to be a consensus that a recovery is round the corner but I'm not sure that H2 is going to be that much better than H1. I suspect that in the short term we will see more efforts to improve the banking sector and that will briefly boost markets, but I'd be very surprised if we didn't see further dips in Q2 and Q3. Only after that do I think we could see signs of a more solid recovery."

On a valuation level Clark does not believe the small cap market is currently ‘raging cheap' as a whole, arguing that its pricing/earnings ratio of around 7x is not quite as inexpensive as it looks.

"You really have to question the numbers you're on and the value of the stock. It is not as cut and dried as it seems. I believe the actual P/E ratio is more likely 12x 2009 earnings."

Nevertheless, Clark argues that when a sustained recovery does come, investors, no matter what the current valuation level, will benefit from exposure to small caps.

"Large caps will react first to any good news followed by mid caps and then small caps. When there is a little more conviction that the recovery is here I have total faith that small caps will outperform, with some stocks liable to grow four or more times. Large caps will be left behind."

Although markets remain volatile, the UK Smaller Companies fund has enjoyed a good start to the year. The fund is a top quartile performer since Clark took over management in November 2004. He believes the good performance should continue following a recent portfolio review.

"We have been changing a few things around rather than just sitting and waiting for the markets to change and I am reasonably happy with the portfolio where it stands at the moment."