Healthy corporates make a good buy

IT was heartening to see the FTSE 100 close in the black yesterday, in the first sign that investors are starting to return their focus to market fundamentals after the panic selling of recent sessions.

The past two weeks have cut the level of the FTSE 100 by a fifth and many of its constituents are down more than that, as investors have ploughed their money into bonds and highly-priced gold.

High time, then, that savvy fund managers say they are starting to return to equities to snap up well capitalised, strongly growing companies that yield high dividends.

As Fidelity said yesterday, price to earnings ratios were looking low before the latest sell-off. The slump of the past few days, combined with hefty profit rises since the start of the year, means many FTSE 100 stocks now boast p/e ratios of less than half their 20-year averages.

FTSE 100 company earnings per share have jumped 27 per cent since the start of the year. From insurers to hotel operators, property developers to telecoms providers, firms have stormed ahead, despite fears over global growth. They are cash rich, growing without using debt, and snapping up rivals.

Dividend yields are also high, as shareholders press boards to either use or return the cash piles they have accumulated.

There are still plenty of risks to the downside, as Europe and the US problems are far from resolved. But fund managers say the market has priced in much of the bad news now, while gold’s high price makes it a tough buy. While nobody is abandoning safe havens yet, now could be right to buy.