Investment Week – Economic recovery offers further opportunities
22 April 2010
Despite their strong rally over the last year, we think UK equities have further to go. Our meetings with company management have been encouraging and this is backed up by strong earnings upgrades. Consensus earnings revisions have remained in positive territory since August last year, driven mainly by cost cutting but also by sales upgrades. The economic picture is less clear, with the UK relatively slow in emerging from recession. However, monetary policy is set to stay accommodative for some time, stimulating retail sales and activity in the housing market.
As a result, we maintain a preference for companies geared towards a cyclical economic upturn. Industrial stocks such as auto-parts manufacturer GKN, paper producer Mondi and engineering firm IMI have performed well and we expect further upside. Recent strength on the high street and capacity withdrawal has also been positive for the retail sector, including companies such as HMV Group, DSG International and Debenhams. Meanwhile, the mining sector has provided a rich seam of returns as companies such as Xstrata and Rio Tinto benefit from robust Chinese demand.
In the short term, uncertainty over the emergence of a clear winner in the forthcoming election may create some uncertainty. However, UK equities are still attractively valued both on a historical basis and compared to other asset classes. The market is well supported by strong cashflow, improving earnings and an attractive dividend yield. A pick up in merger and acquisition activity, which is starting to come through, should provide further support. There remains a variety of opportunities for investors.
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Bull points
- Market supported by improving corporate newsflow
- Signs of economic recovery becoming self-sustaining will prove positive
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Bear points
- Potential uncertainty created by a hung parliament
- Fragile sentiment over UK economic recovery prospects
Karen Robertson, Manager of Standard Life Investments’ UK Equity Growth Fund
This article was first published in Investment Week on Monday 3rd May 2010.
