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Home > Blogs > Ian Fraser > UK’s uncertain outlook clouds stockpicking picture

UK’s uncertain outlook clouds stockpicking picture

Finance Blogger: Ian Fraser Ian Fraser

The man who took over the reins at Fidelity International’s Special Situations Fund from the legendary investment manager Anthony Bolton has been outlining his investment vision.

Sanjeev Shah said that his preference is for companies capable of “generating solid underlying organic growth”—largely because of his suspicion that UK economic growth will remain muted for some time.

Even though the UK recession officially ended in the fourth quarter of 2009 and PMI data suggests economic growth should accelerate in the coming weeks, Kate Barker, an outgoing member of the Bank of England’s monetary policy committee, sounded a note of caution on March 8th. She warned that the pace of UK economic recovery is by no means assured. And Richard Jeffrey, chief investment officer at Cazeonove Capital Management, has warned the UK could be entering a period of deflation. In a recent research note [PDF, 59K], Jeffery wrote:

“We now see a number of forces coming together that suggest the risk of deflation is greater than widespread forecasts of a steady recovery in demand might signify. The biggest issue is that wage inflation is exceptionally low and falling.”

In this climate, Shah favors stocks with “unrecognised growth potential.” In particular he’s been tapping into unloved sectors including media, where he sees value in players including WPP, BSkyB, and Pearson; technology, where he sees companies such as Logica as capable of offering organic growth in a low-growth environment; and real estate, where he favors British Land and Land Securities, whose yield credentials continue to be overlooked by investors. However, Shah remains underweight in commodities which he believes are expensive on a fundamental basis. He added:

“Earnings have been beating expectations but much of this has been driven by fairly aggressive cost-cutting and we will increasingly need to see volume growth to drive earnings further. Valuations, however, remain reasonable, still toward the lower end of their historical ranges on both price-to-book and free cash flow measures.

“The conditions are there for M&A activity to pick up in 2010 as companies look to acquire growth in a low-growth environment. I think management teams that are keen to create shareholder value will increasingly consider M&A strategies.”

Shah said that, even though the most propitious moment for buying into equities has passed, there are reasons to be cheerful about equities. In January 2009 many commentators were predicting a second Great Depression, which he said was great news for stockpickers such as himself as valuations were bombed out.

While investors are much more optimistic today, Shah said peak-market exuberance remains some way off, and that this encourages him to be positive about equity markets. While he predicts a further correction in 2010, he said he will treat this as another buying opportunity.

Leigh Harrison, head of UK equities at Threadneedle asset management, is marginally more cautious about UK investment. He is concerned about lack of appetite for credit and banks’ reluctance to lend. “De-leveraging at the government, corporate and consumer levels is likely to result in muted demand for the next several years,” said Harrison.

He also warned that a “hung parliament” at Westminster after the May general election would be negative for equities as it would probably give rise to policy stasis. Harrison prefers companies whose earnings are not tied to the UK economy, which sell into faster-growing Asian economies as well as defensive growth companies left behind by 2009’s liquidity-driven rally.

Further reading for UK equities



Tags: economic recovery , equities , fund management , GDP growth , Mergers and Acquisitions , stocks and shares
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