There are reasons to be gloomy. The banking system is on its knees. Recession is coming, almost everywhere. This is an easy environment to get pessimistic, very pessimistic. This is exactly what investors have done.Sections of the UK stockmarket are getting extraordinarily cheap. There are over 150 stocks with dividend yields at least 2% above 20 year gilts. This doesn't happen very often. There hasn't been this many stocks that are this cheap since March 2003. Even in the banking crisis of 1973/4 there weren't this many.The last 18 months have been horrible: the average stock in the Fund has just about halved. The prospective dividend yield is closing in on 7% net. Despite the trauma so far - two stocks have gone bust already, and a noticeable number have suspended dividends - the dividend on the Fund has grown again (up by 16% in 2008).It is very unusual to be able to build a Fund which owns a diversified slice of corporate UK with a dividend yield this high relative to safe assets like gilts and index-linked gilts. Stock markets have been through a lot of stress in their long history. Stock market history shows two simple things. First, stock markets survive. Second, buy stock market risk when it is high - the returns are much, much better than when it is low.
Most of the stocks likely to be sold will be in companies where times are so tough they have stopped paying dividends - like banks. I will be looking especially hard at companies' balance sheets and cash flow statements. The economy is likely to be tough so my emphasis will be on companies in distressed areas of the economy (where pessimism is very high) which are robust.