Mike Felton, manager of RSA Investments' UK Prime fund, is beginning to reduce his overweight exposu...
Mike Felton, manager of RSA Investments' UK Prime fund, is beginning to reduce his overweight exposure to cyclicals and is increasing the fund's exposure to more traditional growth areas.
In particular, Felton is increasing the portfolio's holdings in pharmaceuticals and support services, both of which are currently on small premiums to the market.
With leading indicators close to peak levels and new orders in the US picking up, Felton believes now is the time to move back into traditional growth.
However, he said, the market is not accepting this. The catalyst for making the broad mainstream of investors recognise it is time to rotate back into growth stocks would be an increase in US interest rates, he believes, which would indicate a concrete improvement in the US and an improvement in companies' corporate earnings.
Felton added: 'The market is not in the mood to take anything on trust but is content solely with the here and now. The extent to which a company's valuation has a blue sky element attached to future as yet intangible growth potential is currently being afforded little or no value.'
This, said Felton, is clearly manifest in the tech and telecom sector but also in pharmaceuticals, in particular biotechs, and in some support service stocks.
He added: 'The consistent theme is an aversion to long duration. The market has consequently moved to the other extreme, to the position occupied in early 2000. Just as we felt it was wrong then to be overly bullish, we feel it is now wrong to be overly bearish.'
The appeal of the cyclicals, said Felton, is the expectation that, with the macro background showing signs of improvement, there will be a shift in the balance of surprise from negative to positive.
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