SIMON MURPHY, manager of the Old Mutual UK Select Equity fund on UK Growth
Various recent economic data releases have signalled a slowdown in growth momentum globally, prompting more bearish commentators to talk of a double-dip recession.
We disagree, believing instead this is the natural course of events at this stage in a recovery. Double dips are very rare, occurring just twice in the last 100 years in the US. There could be one this time, but we certainly do not expect it.
UK companies remain in good health, with strong balance sheets, record free cashflow levels and continued positive earnings momentum. Earnings growth is now being driven by top-line growth surprises, not just cost efficiencies.
The market is cheaply rated, trading on a forward P/E of 10x, against a long-run average of 13.5x. Even if the assumption of around 16% aggregate earnings growth in 2011 proves too optimistic, there is still scope for further multiple expansion. This is a key reason for our optimism – we do not expect a particularly vigorous economic recovery, but given a modest recovery and further profits growth, there is significant scope for valuations to rise, resulting in a reasonable return to shareholders.
We should not ignore global economic issues, particularly the sovereign debt situation in peripheral Europe and its potential to cause further, more widespread banking problems.
Meanwhile, the European bank ‘stress tests’ have provided some clarity regarding capital strength and some comfort to nervous market participants.
Simon Murphy is manager of the Old Mutual UK Select Equity fund
