UK equities have now become so cheap compared with bonds that stocks represent the “bargain of the decade”, according to Paul Meader, a senior investment professional at Collins Stewart Wealth Management.

Meader - a member of CSWM’s asset allocation committee – said UK equities look cheap in the light of their implied risk premia and also argued that this value was tempting as earnings growth is expected to be 30 per cent or more in 2010.

“Quietly and steadily over the past 6 months, the elastic band of valuation between bonds and equities has become more and more stretched. If you compare nominal bond yields to equity dividend yields then equities look very attractive in an historical context. Of course, the worry must be that in today’s unusual economic environment, this historical relationship counts for nought. However, what is interesting is that, despite all of the problems of the last few years and ongoing economic uncertainty, the corporate sector is in rude health,” Meader said.

For the last 30 years, Meader said, the extra return implied from equities over risk-free assets has moved between 1 per cent and 5 per cent per annum, but since 2007 it has expanded significantly, peaking around 8 per cent in the UK and US around March 2009.

“Whichever way this plays out, the facts are irrefutable: the elastic band is stretched, and at the very moment when many now say that the “cult of the equity is dead”. In all likelihood, equities promise excellent return prospects at the very time when most investors have given up waiting,” he said.