Kames' Adams: UK plc earnings will fall short in 2012

Kames Capital's head of UK equities Stephen Adams has predicted UK plc could see negative earnings in 2012, undershooting consensus forecasts by 15%.

The manager of the £360m Kames UK Equity fund said companies' earnings forecasts of 9%-10% in 2012 are too optimistic, and he is expecting to see increased profit warnings in the coming year.

"Earnings forecasts are too high, we think earnings will be closer to zero or -5% but not 10%, there will be lots of profit warnings, the forecasts are just not realistic."

However, Adams said yields are likely to remain robust despite a depressed outlook for corporate profits.

Peter Shaw, who will become co-manager of the UK Equity fund on 1 January 2012, added: "Quality of stocks is very important at this stage. We are looking for strong balance sheets, high dividend growth, and companies that are buying back shares."

The fund is overweight Imperial Tobacco and GlaxoSmithKline, companies the managers expect will deliver against their earnings forecast.

"We are also bringing stocks to the fund that are considered boring such as Bunzl which distributes rubber gloves and food trays," said Shaw.

"It will deliver 5%-6% growth every year, regardless of the economy, and we are pretty certain it will not have a profits warning.

"It is the kind of company that does small acquisitions which it does not announce individually as they are too small but when the results come out we find it has acquired three of four small businesses - we do not get that from many stocks."

Adams and Shaw have also become less negative on the domestically focused stocks and have been adding to names from the retail and housebuilding sector on weaker market days.

"We are not outright bullish on these, we are more sanguine," said Adams.

"We have picked up Dunelm, Next and Bovis but we are still 4%-5% underweight UK banks and have been since 2008."

"Financial services are a challenged industry. I do not think it is a good place to be after a credit-induced recession, and the sector will take the majority of the pain."

They also have been adding to Burberry in the 70-stock portfolio in the view fears it will suffer from a China slowdown are overdone.

Over the past year the fund has fallen 11.3% against the UK All Companies sector average loss of 8.3%, according to Morningstar.

Adams said the fund had been too optimistically positioned in cyclicals and has been adjusting this recently.

He said: "We took a lot of pain by repositioning the fund in 2011 but it was the right thing to do and it means we are set up for 2012.

"I think it will be a year where large caps and mega caps will do much better. They have some of the best companies with secure yields and reasonable valuations so this is where we are positioned."