As the UK economy begins to show signs of life, Rebecca Jones asks three investment experts how to make the most of the recovery.
Co-head of multi manager, F&C
First of all, there is not much correlation between economic performance and stock markets. If the UK stock market from 2009 reflected the underlying growth in the economy it wouldn't have recovered 50% plus in the last four years. It's important to make that point: sometimes the lines cross, but they can go in different directions and that is normally what happens.
However, we are looking forward to a better period for the UK economy and that leads to a number of investment conclusions. One of those is that returns from safer, defensive sectors like pharmaceuticals, food and beverage companies and tobacco will perhaps not be as good as those from growing areas of the economy such as industrial cyclicals, the consumer area and financial sectors.
One also immediately thinks of small and mid-cap companies, particular small companies. Smaller companies have done well recently, but as the economy recovers and confidence improves corporates get more comfortable with undertaking mergers and acquisitions and it's the small-cap stocks that are likely to benefit.
In terms of financials, if one takes the view that the economy starts to get better and stock markets start to perform better over the next five years, you can say that asset managers and wealth managers might be somewhere to look. In the banking sector, if there is survivability here outside the two state owned banks, as economic traction takes hold banking should also do better.
The key is to go for a diversified portfolio with a good manager that is flexible enough to move from more expensive defensives into perhaps the more cyclical stocks and then go back again.
Investment manager, Architas
The appointment of Mark Carney as governor of the Bank of England (BoE) suggests that we are going to see more aggressive growth plans for the UK. Carney has also committed to maintaining low interest rates for longer, which will have knock-on effects in the housing market and general consumption.
A lot of macro indicators are also improving in the UK. Another factor is that we're starting to see a stabilisation in the eurozone. That's important because the UK trades significantly with the eurozone and if you do see a pick-up in consumption in Europe that will benefit UK companies.
On the negative side there is a slowing of growth in China and this has had a negative effect on a lot of commodity companies. However, this can be a positive for some companies such as industrials which need commodities in their production process, so if commodities are cheaper production is going to be cheaper and profits will be higher.
Tilting towards domestic and industrial, that would lead people towards looking at mid-caps. This is an area that's obviously done quite well, but there are a number of reasons why it can continue to do well. These include the recovery in the economy, cheaper commodity prices and a weak sterling due to the BoE implementing quantitative easing.
Also if you look at equities versus bonds, you do get a higher yield from investing in UK companies than from fixed income at the moment, particularly in gilts. People are also aware that the economy is stabilising so it is likely that we're closer to the beginning of the rate rise cycle than the end.
Investment management director, Brooks Macdonald
The pick-up in the domestic UK market is a theme we've heard about recently and it seems to be gathering steam.
Quite a few managers are adopting the view that the easy money in international positions - the Unilevers, the Diageos - has already been made. Those sorts of stocks are now looking expensive and managers are seeing better opportunities from more UK domestic focused positions.
The recovery in the UK housing market means that a few managers are investing in banks, particularly Lloyds, as a play on the fact that mortgage approvals are still relatively low compared to their highs.
However, I think people are still a little cautious around banks; there's a lot of potential there for fingers to get burnt by assets that haven't necessarily been priced on to books correctly.
Food retail has also been mentioned; some managers have got positions in Tesco and Sainsbury's, which were not terribly loved not that long ago. It's an area where retail volumes are very low so it could well be that we see an increasing pick up there.
With the rise in consumer spending, even some of the travel providers like TUI could benefit.
The other area is UK smaller companies. It's an area of the UK domestic market that did incredibly well last year and so far this year and indeed has been very resilient so it's interesting.
As to whether or not that will continue, I would be surprised if smaller companies can continue to deliver the same returns as we've seen recently, but over the longer term we still expect some decent returns there.
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