HSBC UK Focus manager selling out of stocks that are susceptible to government cuts
HSBC head of UK equities Alec Letchfield believes corporate earnings could beat expectations this year but fears changes to monetary policy could lead to volatility.
Letchfield, who manages the £4m UK Focus fund, has sold out of stocks such as BAE Systems and Carillion as he feels both will feel the effect of major cuts to government spending regardless who wins this year’s general election.
Instead he has increased holdings in Compass Group, Carnival and Britvic to individual positions of over 3% each.
Letchfield says these stocks stand to do well in a recovery as businesses outsource and consumers spend more carefully.
“Carillion is good company, but as a contractor that does a lot of work for the Government and local authorities it could come under pressure,” Letchfield says.
“BAE is another good-quality company, but obviously has a very large exposure to both UK and US defensive expenditure. Whichever way you cut it, this will come under pressure through Government spending cuts.
“Both could come back again in the future, but in the short term they will remain under pressure.”
Letchfield remains calm over the effect of the UK economy as his focus is on companies with high overseas exposure such as oil companies, pharmaceuticals and miners.
However, he warns another round of quantitative easing is a concern for equity markets and is likely to lead to renewed volatility.
“There is another large bond issuance expected this year and the central bank will not be in a position to buy them back this time,” Letchfield says. “The question is, who is going to buy them this time?
“We believe they will be bought, but it may be yields will have to rise quite sharply. The problem with that is it does make the valuation of equities a little bit more expensive compared with bonds.
“Nonetheless, we believe monetary policy will remain quite accommodative whatever happens, but will possibly lead to volatility within markets.”
