Many people have been surprised by the recent rally in UK equities as sentiment became gloomy towards the end of Q2.
Concerns over the impact government austerity measures would have on the outlook for growth as well as worries over the financial system saw equities fall.
What has triggered the recent rally has been another strong corporate results season with the majority of companies beating expectations across most sectors. We were not surprised by this strong performance from the corporate sector and had been positioning our fund holdings accordingly for some time.
This is especially true in the financial sector, where we have been overweight Lloyds, which we still consider to be attractive with the prospect of substantial dividends and share buy-backs when the company is able to resume payments to shareholders.
Other stocks in the financial sector we consider to be attractive are mortgage provider Paragon and consumer finance company International Personal Finance. Both firms have the dual attraction of being cheap and operate in growth markets.
The other notable feature of the last six months has been a resurgence in corporate activity – we expect this to continue as company balance sheets remain strong.
Despite some signs of weaker economic growth in many parts of the world we believe the valuation of the UK, the likelihood of continued takeover activity and a recovery in corporate profitability should ensure equities make progress in H2.
Charles Deptford is manager of the Smith & Williamson UK Equity Growth Trust
