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Sector Focus: UK all companies fund manager views

Hooper

Jamie Hooper, manager of the AXA Framlington UK Growth fund

UK equity returns have been strong. A powerful cocktail of low-starting valuations, huge liquidity stimulus by central banks and improving economic data have prompted the return of risk appetite. But can the good times last?

We are fast approaching another debt ceiling impasse in the US while fears of QE tapering by the Federal Reserve have only been deferred. These events add uncertainty and volatility to markets and equities historically weaken, initially at least, on news of policy exit.

Strong UK GDP revisions have  notably failed to translate into corporate earnings. We have seen two years of aggregate profit downgrades, yet UK equities have powered on regardless. A number of sentiment indices look stretched and for some the current level of optimism is unacceptable.

However, we remain positive. Liquidity withdrawal will be gradual and reflects a normalisation in the global growth outlook. Inflation remains limited, giving policymakers some latitude in their approach. The US economy appears resilient (as the drag of sequestration abates), Europe and the UK are recovering, meanwhile investors seem fully aware that emerging markets and Chinese growth has slowed.

Equities have re-rated but the valuations remain fair rather than expensive, in my opinion. I believe companies are in good shape, cash generation and capital returns abound, while 2014 may finally herald the recovery in capital expenditure and earnings.

So our approach is to keep it simple: find good companies and stick with them. Core compounders such as Whitbread, Compass, Rightmove and BT Group can in our view deliver healthy organic growth and rising and resilient margins, enhanced by growing cash returns. We tactically consider large caps that have lagged this rally, especially with Vodafone sale proceeds looking for a home in early 2014.

 

 

David Coombs, head of multi-asset investments at Rathbone Unit Trust Management

2014 is a year in which developed equities will remain the place to be, with the focus very much on domestic earners.

This will be a year of two markets. Taking a two- to three-year view, we expect a rebalancing, away from the developing world towards the developed world, towards the West. Developed markets will be characterised by low rates, subdued inflation pressures, and low to moderate growth. 

Furthermore, central banks will continue to err on the side of growth. 

We expect developing markets (defined here as Asia and emerging markets) to experience rising inflation and weaker growth.

There will be no V-shaped, momentum-driven resurgence in global economic growth in 2014. Instead, we expect a modest recovery, driven by the US. Consequently, we will remain focused on domestic earners, particularly in the UK and the US, to provide the impetus.

We are now more positive on the UK economy and moderately constructive on the UK market. Positive sentiment has been supported by a stoking of the housing market, ahead of the General Election in 2015, and we are mindful of bubble territory. The election will be critical, and we are cognisant of any political grandstanding during the run-up. With regard to interest rates, the situation is too nascent for a rise; indeed, a hike is unlikely ahead of the election. 

There is little wage inflation (notwithstanding any significant downward pressure on sterling or an over-heated housing market).

We are not getting excited about the FTSE 100 but will be focusing on micro, small and mid-cap domestic earners. It is becoming increasingly difficult to find value in these areas because of outperformance but there are enough stocks in the universe to take advantage of a return to growth.

We are invested in the Marlborough Special Situations fund, managed by Giles Hargreaves, who invests in smaller companies, new issues and those companies experiencing difficulties but with good growth prospects. This fund is held in our Enhanced Growth Portfolio.

Richard Black, manager of the L&G UK Equity Income fund

As populations in the developed world have become increasingly skewed towards older people, retirement income requirements have increased, and in an environment where government bond yields are depressed, generating income streams has become
a challenge.

In this environment, equities look an ever more attractive source of income. Large amounts of liquidity are coming into equity markets as a result – particularly the higher- quality, high-yielding parts – as this search for income intensifies. As income investors, our strategy is to focus on quality income  – that is, dividend-paying companies that have strong balance sheets and robust underlying businesses.

These companies exhibit what Warren Buffet describes as an “economic moat”: they have strong pricing power and barriers to entry and as such they possess the ability to protect profits and generate sustainable, growing income streams. 

We believe that those strategies focused on high-quality, sustainable equity income and robust dividend growth should outperform over the long term, demonstrate reduced volatility and offer investors considerable protection from downside market scenarios.

We continue to focus on high-quality cash-generative businesses with secular growth such as N Brown and ITV as well as companies with significant self-help potential such as Aviva and Halfords. In addition, we feel merger and acquisition activity is likely to pick up somewhat as corporate confidence returns, with companies like QinetiQ likely to benefit.

 

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