F&C’s Scott predicts sector rotation in 2010

25 November 2009 4:27 pm | By Hannah Stodell

At a F&C Investments 2010 outlook roundtable in London, director of UK equity strategy Scott said in the second leg of the bull market, as interest rates start to rise these stocks are likely to suffer and underperform. 

He said: “I think you will see some rotation of leadership within the market.  In particular cyclical and interest rate sensitive shares look more vulnerable.  That means some financials, including the banks, but also general retailers and property.  The late cyclicals which would include the commodity shares should continue to do quite well. 

“As you come to the second leg of a bull market, you get nearer the time where interest rates go back up again, the easy money which has been fuelling the bull market will be less of a factor going forward and that is particularly true of interest rate sensitive stocks.” 

Scott said it was difficult to predict when interest rates would rise due to uncertainty over timing of the quantitative easing programme but said it was likely to be at some point in the second half of 2010. 

But he said: “The bond market may well be discounting it ahead of that even if interest rates go up in September or October for example, so you may get bond yields rising ahead of it and that is just as important if not more important than rates going up themselves.”   

Scott highlighted major oil companies as a hotspot for 2010.

He said: “A lot of people have been worried about big oil stocks because they pay big dividend yields. The oil price would have to drop below 50 dollars before the companies would consider cutting their dividends and I don’t think that is very likely, the oil price might continue to rise.”

Telecoms was another sector of choice as was good quality defensives such as pharmaceuticals, which, Scott said, would benefit from a stronger dollar, a currency likely to rally signifcantly next year.  He was less favourable on classic defensives, such as tobacco.

Scott said the UK faced significant challenges in 2010 but was likely to officially emerge from the recession when fourth quarter figures are announced early in 2010.

He said: “2010 will be reasonably good for UK equities, another positive year but not as positive as this year. It is very unusual to have a bull market without a significant correction at some point.  We have had a significant rise in the market and I think there will be a bit of sector rotation and it will be more about stock picking in 2010 compared to macro calls as it was in 2009.”  

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