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UK equities can still deliver

Doubts remain about future prospects for the British economy but there are companies that can pay off for investors

Investors are being increasingly urged to send their money East to profit from the fact that emerging markets and Asia in particular are expected to be the main drivers of global economic growth over the coming years and decades.

You only have to look at the rapid economic growth in many emerging markets to see why this argument is gaining ground.

For example, the Singaporean government has forecast that the economy may record growth of 15 per cent in 2010.

Meanwhile, in the UK, there are concerns about the threat of a double-dip recession, given the scale of the proposed public sector cuts and the rise in VAT to 20 per cent next year. Other economists are fretting about a rapid recovery and an upward trajectory in the rate of inflation and interest rates.

The most likely scenario, however, is that the UK economy will continue its recovery, although it will not be a strong one. The British Chamber of Commerce recently revised up its forecast for economic growth in 2010 from 1.3 per cent to 1.7 per cent.

Despite the prospects for slow growth, we believe it would be a mistake for investors to disregard UK equities altogether.

Many UK-listed companies are enjoying attractive rates of earnings and profit growth. This is particularly the case for international engineering and service companies and those UK companies with good recurring revenue streams.

Indeed, good corporate earnings have recently been winning the stockmarket battle against economic fears. Take Halma as an example. Many of its brands are global market leaders and the company is strong in intellectual property. In the summer, the company reported a 9 per cent increase in profits, the 31st consecutive year of dividend growth in excess of 5 per cent for the firm.

Spirax Sarco has grown its dividend every year for the past 42 years and it is also rich in intellectual property and has a strong distribution network. The company benefits from the depth of its customer relationships. It has 35 training centres across the world and 100,000 customers from 56 countries. Around one million students have completed long-distance learning through Spirax Sarco.

Domino’s Pizza is an example of a company that has prospered despite the constraints of consumer spending in the UK. The company reported in the summer that earnings per share had grown by 27 per cent. It has prospered through having a national distribution network of 627 stores delivering pizza as quickly as possible and supported by innovative marketing.

There are fresh concerns about the health of the housing market but Rightmove has shown its resilience. In 2009, around 30 per cent of all homes sold were first seen on Rightmove. It is not just about the number of properties sold but how often people look at the Rightmove site.

With their pictures, other information and email alerts, websites are taking market share away from traditional newspaper property advertising.
There are still question marks about prospects for the UK economy but Halma, Spirax Sarco, Domino’s Pizza and Rightmove are just some of the companies that have successfully countered the challenging domestic environment to generate significant earnings and profits growth. They are four compelling reasons why investors should not disregard UK equities.

Anthony Cross is co-manager of the Liontrust first growth, first opportunities and intellectual capital trust funds


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