With the UK consumer burdened by high levels of debt and interest rates likely to rise, managers hav...
With the UK consumer burdened by high levels of debt and interest rates likely to rise, managers have been favouring defensive stocks at the expense of consumer cyclicals.
Ed Collins, manager of the New Star UK Dynamic fund, says: "Although we do not believe there will be a hard landing, we are wary of any exposure to the consumer cyclical sector. It is likely that the Monetary Policy Committee will hike interest rates again from 4.75% if inflation increases. The consumer is heavily indebted and any further interest rate movements will impact their spending habits.
"We are focused towards companies which are defensive in nature and we can see where the profits are coming from."
Charles Deptford, manager of the Barings UK Growth trust and Barings Equity Income fund, shares this view. He says analyst expectations of UK companies are too high. "If consumer spending falls, consumer cyclical stocks may suffer and start issuing profit warnings."
Both New Star and Barings have overweight positions in companies involved in products that will still be in demand regardless of economic conditions. New Star has an overweight position in pharmaceuticals because even if the economy slows those who are ill will still need medicine.
Collins says: "Pharmaceuticals groups such as GlaxoSmithKline and AstraZeneca both have visible earnings growth as we know the drugs they produce will still be needed in the future."
For similar reasons, Deptford favours food producers such as Unilever. Unilever is in Deptford's portfolio as profits have been up 3.4% in the first half and 3.9% for the quarter on the back of growth in its health food brands.
Another sector which falls under this theme in Deptford's fund is transport. He likes bus companies such as Arriva and Stagecoach because even if there is a downturn these services will still be used.
According to Deptford these companies are also consolidating in the industry and are being bought out by private equity groups, which has pushed up the share price.
Alongside these sectors, Deptford also favours the support services sector. He explains these companies have a high degree of revenue certainty as the government contracts these firms. Companies in his portfolio include business outsourcing group Capita as it has been winning contracts from local councils to provide software services. These contracts have been valued at more than £700,000 over a five-year period.
Elsewhere Deptford has a small bias in financial company Mann Group. He says: "The company is undervalued and has been misunderstood by the market, despite its strong cash flows and long-term business growth. The group has strong profit growth from distributing its products globally, which the market has not taken into account."
Collins has also positioned the New Star portfolio towards financial groups benefiting from growth in countries outside the UK. In the banking sector he likes Barclays as the group recently purchased South African financial group Absa.
He says: "The South African finance market has been performing well and the market has not taken into account that this acquisition will provide Barclay's with an extra income stream."
Meanwhile another defensive company Collins likes is aerospace group Rolls Royce as it has a $1bn airline order book.key points
UK interest rates still rising
Managers positioning portfolios defensively
Support service sector performing well
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