AXA's Thomas: UK equities are cheap, but will stay cheap

Nigel Thomas, manager of the £2.8bn AXA Framlington UK Select Opportunities fund, has said UK equities are cheap, but have little scope to rise in the current environment.

Thomas referred to his old investment mantra that "things will not necessarily get better or worse, but will become different", but said politicians and ‘eurocrats' remained a stain on the financial markets of the world.

In the UK, Thomas said pitting the political will to reduce the debt-to-GDP ratio against a context of slowing global growth will make the outlook for equities uncertain.

"The prospects for UK companies in this low GDP growth environment are many and varied. In my view, UK equities are cheap, but will remain cheap," Thomas said.

In this context, the managers is optimistic there are companies that can prosper, even in unloved sectors such as UK retail, where Next's attitude to shareholder returns and conservative management have helped its shares rise 16% this year.

Many aspects of Thomas' portfolio are geared to capitalise on the ‘app economy', characterised by ubiquitous computing and the digitisation of content. Plays on this theme include Vodafone, ITV, WPP, Pearson and Imagination Technologies, which licences and collects royalties on semi-conductor designs in electronic devices.

Thomas has increased his stake in Vodafone, which accounted for 3.5% of the portfolio as at 31 October, to capture some of these trends as well as the investment returns from their 45% owned associated Verizon Wireless.

Elsewhere, Thomas believes Royal Dutch Shell is set to benefit from its increased investment in liquefied natural gas and has increased his stake in the company, making it his second biggest holding at 4.3%.

"At current oil prices, Shell could grow its dividend by 10% per annum for the next three years from a valuation base of 6x earnings and an existing 5.5% yield. As an aside, you are buying 53 years of current production with Shell, compared to BP's 38 years," he said.