A more benign economic outlook in the US is improving UK market sentiment and supporting a rebound i...
A more benign economic outlook in the US is improving UK market sentiment and supporting a rebound in economically-sensitive, and particularly interest rate-sensitive sectors.
Our principal theme continues to be investment in companies and sectors likely to benefit from the stable, moderate economic growth the UK is experiencing. We believe the stock market has regained a more balanced profile, maturing from the exceptional circumstances up to the end of the first quarter where one sector, technology media and telecoms, overshadowed all others, to a position where economic and company fundamentals have reasserted themselves.
However, tech stocks can no longer be grouped together in the way they were. We believe that the dot.com boom has been seen for the speculative bubble it was. Investors now scrutinise business models with a far more critical eye than they did at the height of the TMT frenzy, but we expect further casualties. Future growth stories will be among companies, which can combine current brand power with new technology.
We are cautious about the telecoms sector. The implications of the third generation (3G) licence auctions, the surprise at the huge sums they raised, and the realisation of what it will cost to develop the new services is just beginning to sink in. Early projections have already severely impacted the balance sheets of major companies within the sector, and it is unclear at this point how these investments will be recouped. Our sector exposure has shifted only slightly over this year. Among financials, we have a bias towards insurance, which we think is a strong growth area given the demographic outlook and projected savings rates. Besides these powerful medium to long term arguments, the insurance cycle also looks more positive short term, with premiums increasing rather than decreasing.
We have taken advantage of weakness in certain sectors to buy stocks we believe represent high quality and attractive valuation.
Enterprise Oil has allowed us to participate in the rising oil price and the holding has been increased. The oil sector has not performed as well as it might have, precisely because the market does not expect the present 10-year high for the oil price to be sustained. Our view is that the benchmark oil price will come back, but not as far as current share prices are suggesting.
Barring any shocks or surprises, we expect the UK to continue to enjoy an environment of moderate economic growth, assisted by the more balanced profile of the domestic market and by improving conditions in economies most closely connected to the UK. From here, we would not be surprised to see the very highly rated shares come under pressure, while other more reasonably priced stocks improve their valuations.
Stephen Whittaker is head of UK investment at Perpetual
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