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Stock horror

UK equities have continued to fall in popularity as spending cuts and high inflation take their toll on con-sumers and corporates operate against a tough economic background.

According to the IMA asset management survey for 2010, which covers the 12 months to December 31, UK equities represented 43 per cent of total equity exposure, down by 4 per cent from 47 per cent in 2009. In 2006, the figure was close to 60 per cent.

The IMA estimates its members now account for 38 per cent of UK domestic stockmarket capitalisation, equating to £768bn.

In 2010, emerging market equities accounted for 9.7 per cent of the total equities managed in the UK, compared with 8.4 per cent in 2009 and 1.8 per cent in 2006.

Threadneedle head of UK equities Simon Brazier says he expects growth in the UK to be slow, so is shying away from cyclical stocks in the £1.2bn Threadneedle UK fund.

He says: “The latest GDP figures are consistent with our view of below-trend UK growth. We have been moving to a more defensive position since last year.

“Housebuilders are interesting because the equity value is lower than the total amount of assets on their balance sheet in terms of land. That provides downside protection so that even in a muted recovery, companies continue to grow margins as they build houses on cheaper land and the input costs remain low.”

UK equities represent 43 per cent of total equity exposure. In 2006, the figure was close to 60 per cent

Brazier has increased his weighting in house-builders from zero in June last year to 4 per cent.

Artemis UK special situations manager Derek Stuart introduced a UK bank to the portfolio last month in the form of a 2.6 per cent weighting in Lloyds but says this is a tactical play to benefit from the “hatred” of the banking sector.

He says: “It is trading at a discount. There may be an opportunity to make some money. People do not want to take debt on and lending practices over the past year have not been great, so you would not want to be in the position for the long term.”

Stuart has been selling down industrials this year as he believes expectations may be overblown.

He says: “A lot of industrials in the mid-cap are being valued as growth stocks but you have to consider whether their growth is genuine or cyclical.”

This year, Stuart has added a 2.9 per cent holding in Reed Elsevier and 1.7 per cent in Man Group. He has upped his weighting in GlaxoSmithKline from 2.5 per cent to 3.6 per cent.

He says pharmaceutical stocks such as GSK will re-rate because as growth in the market slows down, people will look for other growth areas.

BlackRock UK special situations fund manager Richard Plackett says the UK has begun “a painful restructure” from consumer consumption to production.

He says: “For that re-structure to be successful, UK economic growth has got to come from a narrow range of industries weighted towards production areas of the economy. The scale of borrowing means this process will last a number of years.”

Eden Financial head of asset management Ed Rosengarten says: “The UK market has been resilient in the face of headwinds. The market has gone sideways for a number of months but it has not collapsed. Growth of dividends in the UK has been material.

“In 2008 and 2009, UK companies took their costs down and as the economy has started to perform in a more balanced way, com-panies have performed better. There are individual stock horrors but there always will be.”

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