UK managers are positive on the market despite higher interest rates of 4.75% taking their toll on c...
UK managers are positive on the market despite higher interest rates of 4.75% taking their toll on consumer spending habits.
Investment managers at Taylor Young and New Star believe UK corporates are in good financial health, indicated by the fact that companies have been increasing their dividends and buying back shares.
According to the groups, the only problem on the horizon is that higher interest rates might impact consumer cyclical stocks. Both groups are cautious on this sector.
Nick Rundle, senior investment management at Taylor Young, says: "UK consumers are being squeezed. Taxes are rising, bills increasing and spending has come under pressure."
For these reasons, Taylor Young has taken an underweight position in retailers, but does see an exception in Great Universal Stores.
He likes this group as it is demerging into two separate companies - retailer Argos and credit rating business Experian. Rundle believes the two separate businesses will be worth more individually. He favours Argos, as it could be a potential bid target. He also expects Experian to be re-rated when it becomes a standalone company.
Exceptions to retailers in the Taylor Young portfolio are two luxury good manufacturers, Louis Vuitton Moet Hennessy (LVMH) and Richemont, which owns brands like Cartier. He says these companies will hold up because the people who buy them are not impacted by higher mortgage rates.
Meanwhile, New Star is overweight consumer staples. Ed Collins, manager of the New Star UK Dynamic fund sees Morrisons as a recovery story. He favours food retailers as they are defensive in nature due to dealing in an essential resource. Since the company acquired Safeway the group has consolidated its distribution networks, cutting costs for the business.
A different area Rundle sees value in is the oil and gas sector. Although he currently has an underweight position, he plans to take this to overweight. Two companies he is considering are BP and Shell. He says: "They are undervalued due to investor concerns they may struggle to find oil fields. However, it is likely oil and gas prices will increase over the winter period as consumers use more heating. This will be beneficial for these companies' stock values.
"In addition, as seen recently, geopolitical tensions in the Middle East could force up oil prices, which will also be beneficial for BP and Shell."
New Star is also overweight energy stocks. Collins says: "We like oil services companies such as Expo and Abbott, which drill wells on behalf of the oil majors. These companies are profiting as oil becomes harder to source, and they have to dig deeper in the ground. There are few oil servicing groups and major oil groups need them for their expertise so they can charge what they want.
"We also favour BP because it has underperformed due to investor concerns that its production would be hampered after a Texan oil refinery fire. However, the company has been undergoing a share buyback and is cheap."
Another sector in which Rundle is biased toward is real estate, on the back of companies converting to real estate investment trust (Reits) structures. By converting to a Reits structure, companies do not pay tax on qualifying profits, which will help increase the returns for these businesses. For these reasons he has heavy positions in Land Securities, British Land and Hammerson. key points
UK companies in good financial health
Oil and gas stocks look favourable
Consumer staples should perform well
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