Despite threats of market volatility, opportunities will arise in the UK growth and income sector, according to Henderson.
Job Curtis, fund manger of The City of London Investment Trust at Henderson, says there are reasons to be positive about the equity market.
Commodity prices have started to come off and alternative assets such as bonds make equities look cheap on a longer-term basis, he says.
Curtis believes there will be significant deflationary pressure in UK domestic stocks, especially those exposed to UK consumer spending, but says stocks with international exposure will fare better.
“Our portfolio companies earn more than half of their profits outside the UK and with sterling weakening against the dollar this is a definite plus.
“The strength of the US dollar is good for large cap multi-nationals. It will also be a bullish factor for the UK market.”
Curtis says there is considerable recovery potential in the share prices of stronger banks which can take market share on improved profit margins.
“Valuations of equities will be attractive once investors have confidence in the level of future profits and dividends. I don’t see what the alternatives are. Yields on government bonds are very low, and property is blown out.”
Curtis’ top overweight sectors are: gas, water and multi-utilities, beverages, tobacco, real estate and food producers, while his top five underweight sectors include mining and banks.
“We probably want to go more underweight [in mining] but you get bounces from time to time.”
Despite continuing market volatility, there is long-term value in UK equities and the combination of yield and dividend growth is attractive at the moment, he says.
“The sector should do a lot better going forward and high yield shares should make a comeback over the next 12 months, although domestic mid and small caps will probably underperform.”
The UK Growth and Income sector as a whole has suffered with an average return of -20.8% while Curtis’ trust returned -18.3% over the past twelve months.
The trust holds the longest record of rising annual dividends of any investment trust, at 42 years.
“Revenue for the year is very strong, with dividends increasing by 12.6%. We’ve tucked away $4.7m so if we face a difficult period, we can dip into reserves and keep the dividend going,” says Curtis.
The trust currently has gross total assets of £609m.IFAonline
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