By Andy Brough, manager of the Schroder UK Mid-250 fund Investors who believe in recovery are p...
By Andy Brough, manager of the Schroder UK Mid-250 fund
Investors who believe in recovery are placing their bets on the Mid-250 Index. If there is any doubt about this, take a look at the figures: in the final quarter of 2001, when markets began recovering from the shock of 11 September, it outperformed the FTSE 100 by nearly 10%.
The Mid-250 has a far more diverse make-up than the FTSE 100. Many of the businesses in it have a strong domestic focus and are highly geared into the UK economy. Interest rates have been cut aggressively and so many households will have seen their cash inflows rise. In short, they have more money and they are using it. This is feeding through into many businesses that make up the general retailing sector.
They are not the only ones to gain, however. With consumers in good shape, businesses in other areas such as leisure, food production and housebuilding are also benefiting. For instance, housebuilders ' now that they have worked out how to make money on a consistent basis ' look attractive. The demand for new houses is running at nearly twice the rate at which they are being built. Prices are firm and the cost of land is under control.
Food producers are developing new convenience products that are growing in demand and people are spending more on leisure activities. While these businesses benefit from increased spending and are an important part of the Mid-250, long-term success is also likely from those that will participate in the Government's commitment to improving public services. It spends more than £350bn a year, about the same amount corporate Britain spends on UK investment. While this may fall, Government spending should rise. The Government recognises it needs the help of the private sector to rebuild the UK's infrastructure, which means that public/private partnerships are set to become more common. Whether it is improving health, transport or infrastructure, it will need to rely increasingly on private sector expertise. This type of work is often long term but there are few opportunities to take advantage of this trend in the FTSE 100. Instead, investors are better off turning to the Mid-250, which is full of companies in these areas.
Less appealing is IT, which makes up about 7% of the index. Concerns remain about over-capacity among many of these competing businesses, meaning little pricing power. Other sectors, such as non-cyclical services, non-cyclical consumer goods and utilities, are also less attractive, as their more defensive qualities make them not so likely to benefit from the effects of the current interest rate environment.
There is likely to be a continuation of the trend that has set in over the past two months or so ' that is, an increasing focus on the longer-term recovery story as investors look through the immediate economic uncertainty and lack of earnings visibility.
While volatility cannot be ruled out in the short term, increased market liquidity should find its way towards reasonably priced firms with sound business strategies and earnings growth potential. This should ensure the Mid-250's continued outperformance. It offers attractive prospects, given the significant value it has on an earnings basis, and its heavy weighting of those companies that will benefit from economic recovery.
Housebuilders looking attractive.
Heavy indexing of firms to benefit from recovery.
Consumers are in good shape.
Concerns remain about overcapacity in IT.
Volatility can not be ruled out.
Immediate lack of earnings visibility.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till