Threadneedle head of UK equities Leigh Harrison remains cautious in his long-term view of UK equities despite recent improvements in growth.
Harrison says data has confirmed the recovery is now underway, while the Purchasing Managers' Index, traditionally a good leading indicator of activity in this cycle, points to a further improvement in growth over the next few months.
However, he believes deleveraging will hamper demand going forward while consumer hunger for credit remains low and banks are unwilling to lend.
"Despite this encouraging near-term outlook, we remain cautious in our longer-term views and below consensus in our growth forecasts," Harrison says.
"De-leveraging at the government, corporate and consumer levels is likely to result in muted demand for the next several years. At the corporate level, companies are being cautious in adding back capacity shed during the downturn, and banks appear unwilling to lend. Meanwhile, consumer demand for credit remains subdued against a background of rising unemployment."
The looming general election provides an additional layer of complexity, adds Harrison. Recent poll data has raised the spectre of a hung parliament, an outcome which he warns would be negative for equities as it increases the risk of policy stasis.
As a result, Harrison is investing in companies whose earnings are not tied to the prospects for the domestic economy and with access to demand from faster-growing economies in Asia and emerging markets.
Harrison also likes defensive growth companies, which he believes look very good value.
"These were left behind in the liquidity-driven rally of 2009 but, with economic growth likely to plateau in the coming quarters, companies offering solid, sustainable, single-digit growth are likely to be re-rated," he says. "Our portfolios are well represented in such stocks."
