With UK interest rates likely to rise from 5% in 2007, the corporate earnings outlook could be in fo...
With UK interest rates likely to rise from 5% in 2007, the corporate earnings outlook could be in for some headwinds, according to Charles Deptford, manager of the Barings UK Growth Trust.
Deptford says: "We are more cautious than most and believe there could be some difficult times ahead for corporate earnings. Although we do not think there will be a significant slowdown, companies could be impacted by higher rates."
Andrew Green, fund manager of the Bramdean UK equity portfolio, also believes companies are at the end of a long run. Although he does not think there will be a recession, companies may be impacted by higher rates or a downturn if consumers stop spending.
He says: "People have taken on a lot of debt and it is difficult to see how they can carry on. Wage rises are not high, council taxes have increased and fuel prices have been rising."
Although Green is cautious on retailers for these reasons, he is positive on Carphone Warehouse because the company is expanding into Europe.
He believes it will do well out of its broadband business because the group can offer the service free to customers who use their landline service.
Green says Carphone Warehouse is presently trading at a discount and its P/E ratio is 13 times earnings compared to the market average of 15.
A sector that Deptford is overweight in is support services, because of its good long-term growth prospects, with the Government extending contracts in that area. One such recipient is waste management and disposal services company Shanks, because of a shortage of landfill sites in the UK.
"Recycling is becoming a big issue for local authorities and there is still more upside to go," says Deptford.
Another area that Deptford is favouring is the insurance sector. He explains this is because rates are going up and losses from insurance claims have been less than expected. Insurance companies in the Baring's portfolio include Amlin and Catlin.
Meanwhile, Green is overweight in the banking sector. He says: "Barclays is subject to bid speculation as P/E is 8.5 times earnings compared to the market average of 13.5. It is trading at cheaper levels because people are concerned about debt levels and the cycle might worsen.
"However, Barclays has been growing earnings at 10%-11% per annum and its investment banking division has been performing well. It is not likely to be impacted if the cycle worsens."
Green also likes the airline sector and has a position in easyJet. He says the company has long-term growth prospects of 15% per annum: the airline has been adding additional flights and routes to its services and expanding its customer base.
Another position in Green's portfolio is British Airways, whose management has been cutting costs.
He says: "The group is currently operating out of three terminals. However, when the new terminal five is added British Airways will consolidate to this terminal. The company is also adding new routes to its service."
One sector Deptford does not favour and is underweight in is media companies. He explains consumers are not using traditional media such as buying newspapers and magazines but rather using the internet as an information source. He says companies are less willing to advertise in these traditional mediums and there could be risks to earning forecasts as a result. key points
Firms may suffer if interest rates rise again
Banking sector likely to perform well
Support services also to perform
Cautious, Balanced & Dynamic Growth
Cowardly, boring or sensible
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