UK consumers and companies are likely to start spending again as interest rates peak at 4.5%. Manage...
UK consumers and companies are likely to start spending again as interest rates peak at 4.5%. Managers believe the uplift in consumer spending will benefit banking and housing stock, while an expected increase in M&A activity for cash rich corporations, will help stock prices.
Peter Cockburn, investment director of UK equities at Scottish Widows Investment Partnership, says: "The housing market in the UK will have a soft landing. It is bottoming out and starting to show signs of improvement."
For its SWIP UK Growth fund, Cockburn presently shows a biased towards house building stocks. One company is retirement house builders McCarthy Stone, as it has a 70% market share as well as planning permission on land earmarked for development for the next five years.
It also has a PE of seven times earnings compared to the market average of eight, so it is trading at a discount.
Another building company on Cockburn's list is Redrow. This developer has planning permission to build houses at £60,000, which will be aimed at first-time buyers, unable to get on the property ladder.
Cockburn is also overweight in UK banking stocks. He adds: "Banks have been in the doldrums because of concerns over debts and the slowdown in consumer spending. "However, we do not think the situation is, as such, Armageddon, as employment is still strong and interest rates look like they have peaked."
Presently, the SWIP UK Growth fund has mortgage lender Northern Rock in its portfolio. The lender is one of the lowest cost providers and its PE ratio is presently nine and a half times earnings, compared to the market average for domestic banks of 10.5.
Cockburn thinks its PE ratio is trading at a discount because there has been negative sentiment about the housing market. The slowdown in the housing market has not turned into a crash and there have been signs it is improving.
Mark Lyttelton, fund manager of the MLIM UK Dynamic fund, also has some banking stocks in his top 10 positions. He favours HBOS because of its strong lending share.
According to Richard Moore, manager of the Old Mutual UK Select Equity fund, the UK stock market is performing well on the back of M&A activity.
He says: "With a third of the companies in the FTSE 100 already subject to bid activity or speculation this year - strong balance sheets, low multiples and cheap finance - UK M&A activity should continue for a while yet, benefiting companies across the capitalisation spectrum."
Moore also believes with corporate earnings set to remain robust and the next phase of the economic cycle likely to see PE multiples expanding, share prices will continue to benefit.
Moore says: "Performance has been helped by holding a number of stocks which have already been the subject of takeover interest, including O2, which was our largest active position at the time of the bid.
"We enjoyed the added benefit of having a zero weighting in Vodafone at the time of the recent weakness, so all in all our telecoms sector exposure has had a big impact on performance. We have also benefited from Allied Domeq, Boots and Hilton, both of which have been the target of M&A activity, while the strong returns from our mid and smaller-cap exposure have also played a key role in the fund's outperformance."
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