In recent weeks, the FTSE 100 has been stuck in a narrow trading range, from which it may have diffi...
In recent weeks, the FTSE 100 has been stuck in a narrow trading range, from which it may have difficulty moving. The main reason for this is the lack of cyclical stocks within the leading index, which has neutralised the positive impact of a more buoyant outlook for the global economy.
It is our view that equities look cheap relative to bonds and we have seen the worst of the earnings downgrades. Forecasts are looking better and brokers have gone as far as to say that spring is in the air.
They justify this with estimated earnings growth of 7% for this year and 15% for next from FTSE All-Share companies, together with expectations of a UK economic recovery, consumer confidence staying robust and interest rates remaining low.
It is not as if the international environment wants to hold us back. Global recovery is under way, the US Federal Reserve is unlikely to substantially increase rates and oil price rises have not dented earnings growth. With UK GDP growth not as fast as the US, UK interest rates likely to rise before the year-end, and earnings growth and dividend prospects far from spring-like, investors' confidence has been muted.
When one looks at a stock-specific level, prospects for larger caps look to be better outside of the UK, particularly in Germany and France as these countries have a far greater proportion of their large companies in cyclical areas of the market. In the UK, the best prospects for performance would appear to lie in recovery stocks largely within the FTSE 250.
This has encouraged us to increase weightings in recovery stocks, which are sensitive to swings in the economic cycle. Historically, media is one of the first sectors to rebound from a bear market and Carlton could be a major beneficiary of an upturn in corporate advertising, on which 70% of its revenue depends.
There is a broad welcoming of tighter controls and reform of financial reporting. For example, FRS17 reform is now forcing companies to reveal their pensions liabilities. These factors have a dampening effect on the strength of recommendations and the outlook for shares.
A stockpicker's market offers growth for investors on a stock-specific level but for those seeking income, it is more problematic. It is more and more difficult to buy into high and rising yields. However, there are areas of the market that offer the investor prepared to do a little research a high income.
Despite the wave of criticism of split capital investment trusts, many of the older trusts with resilient structures offer healthy dividends without the high-profile problems of their younger brethren.
The UK convertibles market, a forgotten backwater of value, is beginning to stir and looks good for investors seeking a high level of income but not wishing to take excessive risk but gain assured levels of income.
The third area from which we are currently seeking income is to convert profits from more defensive growth stocks to buy higher-yielding cyclical stocks. Even though many equities yield next to nothing and will only provide capital growth, the profits taken can be invested for income.
Equities cheap relative to bonds.
Opps for growth and value investing.
Many investment trusts offer good dividends.
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