Sterling's strength continues to hamper the basic industrials but shows no signs of destroying their...
Sterling's strength continues to hamper the basic industrials but shows no signs of destroying their ability to provide above average yields.
The UK currency has appreciated strongly against the euro since the single currency was launched. Last Monday sterling surged to a new record of 60.61p, the equivalent of DM3.23 and its highest since March 1999.
Hill Samuel Asset Management is overweight the sector believing the global economy offers a favourable backdrop with both Europe and the Far East recovering and the US economy holding firm.
One stock the group particularly likes is Cookson which manufactures electronic materials and ceramics for the steel industry.
Stephen Payne, head of UK Income at Hill Samuel, says: "The shares provide a yield of 4.18% allowing us to invest in more 'growthy' areas of the market such as telecoms. The company itself should benefit from the positive environment of the companies it supplies to. The steel industry is on a cyclical upturn and the technology sector continues to grow."
With the boom in technology stocks in the latter part of last year the basic industries sector has been out of favour. For example, Cookson is trading on a P/E ratio of 16.5 times compared with the FTSE All Share of 28.8 times.
Although the sector is relatively cheap Friends Ivory & Sime does not think it is an opportunity to get some value out of the market.
Paul Galloway, fund manager at the group, says: "The stocks are certainly cheap but the question is whether value can be extracted. There will be some kind of sector rotation which could take place next month or in six months' time."
Galloway thinks capital appreciation in the sector could be achieved if the Bank of England were pre-emptive with rises in interest rates.
He says: "The Bank will have to increase the base rate to counteract the threat of inflation but I would like to see any increases in the first half of the year. Then in the second half sterling could have the chance to weaken slightly against the euro."
Payne believes any kind of growth in the sector will come in the first part of the year.
In particular he says the sector should benefit from GDP upgrades and investors looking for a short-term exit out of the growth in technology stocks.
Friends Ivory & Sime is slightly overweight the sector with exposure to stocks such as Bodycote.
The company, which produces industrial components, is relatively cheap on a P/E of 12 times and should benefit from the recovery in Europe, according to Galloway. It also offers a net dividend yield of 1.83%.
Baillie Gifford is neutral the sector and is unlikely to increase its exposure until sterling weakens against other major currencies, according to Patrick Edwardson manager of the group's Income Oeic. Two stocks which the group has in its portfolios are Hanson, which it is expecting to yield 3.25% in the year. The company is involved in the US government's road building infrastructure programme. Edwardson says: "The stock has been one we've favoured in the last few years but recently we added to it as it was trading on a relatively low P/E multiple of 11 times."
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