The consensus among UK fund managers is to expect 2006 to be very similar to 2005. Continued merger...
The consensus among UK fund managers is to expect 2006 to be very similar to 2005.
Continued merger and acquisition activity, the importance of stock picking, strong overall corporate profitability and a difficult outlook for consumer-facing businesses are themes of note.
Hector Fitzpatrick, manager of Scottish Value Management's UK Alpha Fund, sees potential M&A activity as an underpin to the market.
He says, "This activity is broadening out from the private equity industry to deals between quoted companies. Where there is industrial logic and scope for value creation, investors seem now to be sanguine about this development. Persimmon's acquisition of Westbury is a recent example in the house-building sector."
Trevor Green, manager of the Allianz RCM UK Mid Cap fund, sees the trend being helped by the low interest rate environment, making it cheap to raise capital.
"The high level of activity in the mid-cap sector is mainly because it is far easier to borrow £2bn to take over a mid-cap company than £20bn to take over a FTSE 100 stock," he says.
Richard Moore, manager at Old Mutual, argues strong balance sheets, low multiples and cheap finance should continue to stimulate UK M&A activity for a while yet.
Robin Geffen, manager of the Neptune UK Income fund, is a strong believer that stock picking will win out in 2006, not least because he sees few signs that any particular sector can lead the market up in the way energy and mining did in 2005.
He notes financials are a possible candidate, having underperformed for the past two years but would need some bid activity, perhaps for Lloyds TSB or Alliance & Leicester.
He dismisses the chances of pharmaceuticals leading the pack, arguing the large firms are losing out as blockbuster drugs come off patent and because of increasing innovation among smaller companies and biotechs.
Credit Suisse and Walker Crips agree on one theme: avoid stocks that are linked to consumer spending growth.
Erroll Francis, manager of the Credit Suisse income funds, is negative on media and entertainment stocks on this basis, as is Steven Bailey, manager of the Walker Crips UK Growth fund.
By contrast, Ewen Cameron Watt, head of global research and investment strategy at Merrill Lynch Investment Managers, thinks that the gloom among UK high street retailers is overdone.
He says: "An environment of stable interest rates in the UK will ease mortgage interest repayments and a recovering high street should have a positive impact on UK stocks."
On a global basis there are plenty of managers who think the UK continues to look like an attractive market.
Leonard Klahr, manager of the Old Mutual Extra Income fund, says: "Investors around the globe see the UK as one of the world's cheaper markets, where internationally renowned businesses are undervalued. Tens of billions of pounds are being returned to institutional coffers already benefiting from enhanced share buyback programmes and increased dividend distributions."
Against such a backdrop it is unsurprising that Klahr and Geffen, as equity income managers, suggest this is a good reason to be buying equity income stocks and portfolios.
Klahr also argues the stronger, more stable dollar is a positive for investors in the UK stock market, because around 20% of companies, including the likes of BP and HSBC, declare their dividends in the US currency.
"As a consequence, we believe equity income funds should be capable of delivering excellent dividend growth over the next year or so," he says.
Expect high level of M&A activity to continue.
Strong dollar helps underpin dividends.
Few signs of a sector that can lead market in 2006.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected