Investors need selective stock selection says Omam’s Nickols

Investors will need to be more stock selective as the market moves into a new phase says Old Mutual A...

Investors will need to be more stock selective as the market moves into a new phase says Old Mutual Asset Managers' Dan Nickols.

The Old Mutual UK Select Smaller Companies manager says the equity market is starting to differentiate between economically sensitive stocks with the potential to rally and those which have already priced in the extent of any profits recovery.

"At the recent nadir of the market, share prices for a range of indebted and cyclical UK mid and small cap companies reflected an expectation that they would become insolvent," says Nickols.

"However, the evidence of recent weeks is that conditions are stable enough and refinancing options exist for such companies at least to trade through this downturn.

"With the threat of any imminent failure lifted, riskier stocks have rallied from distressed levels.

"The path of any ongoing market appreciation from here, however, will depend increasingly on the timing and strength of the economic recovery."

Nickols says while we are able to feel more confident about the prospects for equity markets, we are already through the phase of being able indiscriminately to buy shares in riskier companies.

The manager is therefore positive on companies trading at historically low valuations relative to their past peak profits, which in his view have a better potential to outperform than more defensive companies with less scope for recovery.

Conversely, Nickols says later cycle sectors are only now beginning to feel the effects of the economic downturn.

"While the market will from time to time look through the cycle and give these companies string valuations, the magnitude of ongoing downgrades is likely to outweigh any attempts by the market to boost share prices in these sectors," adds Nickols.