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UK equities headed for a real panic: Strategist

Russell Boyce | Reuters

A range of U.K. stocks are trading at "crazy expensive" levels in a market that has "all the ingredients of a bubble" thanks to investors being forced to buy equities due to a dearth of alternative opportunities, Patrick Armstrong, CIO at Plurimi Investment Managers, told CNBC.

Armstrong's comments focus on the midcap FTSE 250 index of smaller U.K. companies, which has seen a 13 percent bounce since suffering a plunge following the Brexit vote.

The frenetic see-sawing in the FTSE 250 contrasts with the more sanguine view investors have adopted in the larger-cap FTSE 100 index since the Brexit vote. The index's multinational composition benefits from the tailwind of sterling weakness and the fillip that can provide to revenues generated overseas.

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While Armstrong noted the attributes of many constituents of the FTSE 250 saying, "these companies give you a dividend yield, there's no cyclical exposure…these companies are great, they're safe," he also warned against making frothy purchases.

"It's a valuation risk, it's not a company risk, but you're just paying too much for these kind of companies."

He added, "The only way equities are cheap is when you compare them to bonds, by any other metrics, equities are extremely expensive and when bonds start to provide a reasonable alternative, start to provide a yield, the equity bubble…the air comes out of that."

Carmel Wellso, Global Director of Research at Janus Capital also highlights the relative attractiveness of equities, telling CNBC last week that equities were "the ones that have underperformed the most and the valuations are by far the cheapest."

However, contrary to Armstrong's cautious note on valuations, Wellso believes the opportunity to buy into the stocks rally is far from over.

Do equities still have value?

"They're trading at the top of their range historically but we've never had this kind of interest rate environment. So there's still potential upside in many of the stock markets around the world."

Much depends on what the central banks decide to do and Tuesday's volatile market reaction to comments from the ECB regarding the eventual winding down of its quantative easing program demonstrated investors' wariness of a post-stimulus world.

While the ECB gave no date for ending support, Armstrong is sharply attuned to watching as the intentions of the world's key central banks clearer.

"The whole rally we've got in equity markets around the world is beginning with QE1 in America and the zero interest rate policy, that's been the fuel of the equity rally. And when that disappears, you can't have these type of multiples."

And Armstrong doesn't envisage an orderly or contained wind-down when the moment does come.

"As soon as you start to see some sell-offs I think you're going to see a real panic."