Despite a succession of rate hikes in the Euroland economies, the Bank of England's Monetary Policy ...
Despite a succession of rate hikes in the Euroland economies, the Bank of England's Monetary Policy Committee (MPC) has felt able to leave rates unchanged for eight consecutive months. How can this be when the European Central Bank has recently been raising them?
One reason is the euro continues to sag; another is the MPC grasped the nettle in good time, first raising rates late in 1999. The result is the UK economy has been growing healthily, with inflation firmly under control.
We still believe UK base rates are likely to peak at, or close to, 6%.
The UK lies further down the economic cycle than either the US or the eurozone and interest rates are likely to begin to move lower from early next year.
With a soft landing in the UK now looking increasingly likely, investors will have to become even more selective in choosing stocks if they are to achieve above-average returns.
Schroder Economics is forecasting the growth rate of the UK economy will dip to 2.8% next year from 3.2% this year.
Indeed, even among stocks showing healthy earnings growth, our strategy is to invest only in those we believe are well positioned to maintain this level of growth as the economy slows.
Last year, growth investing was synonymous to many with technology. Not so now. The market has had a healthy dose of reality which has reduced valuations from their previously high levels. This should not detract from the fact many of the stocks with the best growth prospects remain within the technology sector. Indeed, we have used the recent weakness in share prices within the sector to buy into companies with sound businesses.
ARM, a designer of specialist microprocessors, is one such company. It is enjoying rising earnings thanks largely to its dominant position as a designer of chips used in mobile phones. Another company swimming with the tide is Pace Micro Technology. This company supplies digital receivers and decoders for the booming digital, cable and satellite TV market.
Selected pharmaceuticals companies also offer attractive growth prospects, as well as a degree of insulation from any slowdown in the wider economy.
Companies such as Astra-Zeneca are using advances in technology to control the costs of developing new drugs and to shorten the time it takes to bring a product to the market.
Consumers see healthcare as a priority and are prepared to spend money on it. The high oil price is also benefiting companies like Enterprise Oil.
Early this year we turned towards growth-focussed companies and will continue to add to these positions as opportunities arise. During the coming months investors will have to become increasingly selective in picking stocks.
Chris Rodgers is director of Schroder Investment Management
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