Against a positive global economic backdrop the outlook for the UK market continues to look very pro...
Against a positive global economic backdrop the outlook for the UK market continues to look very promising. Although growth may be on a slowing trajectory, recent GDP data in both the US and the UK has surprised on the upside. Against this, rising inflationary pressures have proved something of a headwind for equity indices, while the Bank of England remains concerned about the strengthening housing market.
Despite some market nervousness over interest rates, prospects for the equity income sector are positive, as growth remains above trend and the Bank of England's attempts to stay on top of pricing pressures. A key driving force behind current market momentum is merger and acquisition (M&A) activity, which continues unabated as private equity and infrastructure funds continue to search for asset backed sectors such as utilities, real estate and pub companies Against this, further dollar weakness is certain to have an impact on selected areas of the market.
We are overweight in financials, which offer attractive valuations and high dividend yields, and from which we expect consistent profit and dividend increases.
However we are wary of dollar headwinds within the banks sub sector. The life and non life insurance sectors remain in favour, with the former being helped by M&A activity and growth in savings, while non life companies are benefiting from what proved to be a benign hurricane season.
The industrials sector is benefiting from secular demand from emerging economies and while we are generally overweight, we are cautious on those with a domestic focus.
Our main focus is on aerospace and defence, where order books are strong, while we also favour selected mid-cap names. We are overweight telecommunications, which offers defensive exposure, continues to re-rate and where sentiment has improved. Stable cashflow has caused us to be overweight pub companies, which are also benefiting from the possibility of splitting into their real estate and operating company components through a real estate investment trust structure.
Against this we are underweight consumer goods, where our focus is on tobacco and beverage companies, reflecting the international nature of these businesses, and scope for earnings and dividend upgrades. We have very little exposure to retailers, which remain under pressure from sluggish UK consumer spending.