Investment Week – Market Lows
01 March 2010
We decided to launch a UK equity recovery fund early last year because of the extreme valuations that many shares had dropped to during the market fall out. It was clear that the market was being driven by fear, rather than fundamentals, which opened up significant valuation anomalies. While market sentiment was very negative, credit markets were gradually opening up, economic indicators were starting to turn and interest rate cuts were supporting consumer discretionary spending. Corporates were also successfully repairing balance sheets through rights issues. All of these factors suggested to us that the economy was stabilising, and that `many shares would deliver material upside over the next few years as global economies and stock markets recovered.
The fund was set up with a bias towards economically sensitive sectors such as general retailers, property, media, banks and capital goods. However, there was also a focus on companies who were set to benefit from competitors going bust and/or those with self help potential, therefore offering near term profit protection and further longer term upside. For example, Mondi, the paper and packaging company, was a large initial holding. As one of the lowest cost producers globally, it had an opportunity to take market share and put prices up as others were forced to close factories. DSGI, the electrical retailer was also a key overweight. It was not only a play on a more resilient consumer but also on the success of a credible management turnaround strategy which the market didn’t believe in.
Despite the recent rally, continuing negative sentiment on economic and market recovery prospects allow us to remain bullish on stock valuation opportunities which, with the help of our UK equity resource, we expect to profitably capitalise on in 2010.
David Cumming, Head of UK Equities, Standard Life Investments
This article was first published in Investment Week on Monday 8th March 2010.
