Investment themes for 2010 and fund recommendations by Mick Gilligan, head of research at Killik & Co
Overall, many of the factors that have driven equity markets higher in 2009 remain in place – loose monetary policy, low yields on cash and governments bonds, attractive valuations and cash on the sidelines waiting to be invested. Against this background, we believe
UK equities will continue to move higher in 2010.
However, we expect another year of uncertainty, with little visibility over a number of issues such as the outcome of the General Election, the timing of an increase in interest rates and the direction of the dollar.
As a result, we would look to invest across a broad range of sectors and take advantage of our current investment themes:
Growth – Over the next few years, we expect economic growth in the UK to remain subdued and would look to invest in companies that are able to grow their sales against this backdrop. In particular, we would highlight technology (Autonomy and Imagination Technologies) and emerging markets/commodities (BG Group) are areas likely to experience superior growth.
Funds that have good exposure to higher earnings growth include Polar Capital Technology Investment Trust,
Axa Framlington UK Select Opportunities and Lazard Emerging Markets.
Survival of the Fittest – Strong companies (Pearson, Man Group and Barclays) are well placed to take market share from rivals that have either gone out of business or are too financially stretched to take advantage of attractive growth opportunities.
The funds we believe have a greater than average exposure to well-capitalised businesses that are positioned to take market share include M&G Global Basics, Findlay Park American Smaller Companies and First State Asia Pacific Leaders.
Yield - With interest rates at historic lows, money in the bank generates little or no return, while the yield from government bonds – 3.6 per cent for the 10-year gilt – is not that appealing.
We believe there are plenty of high-quality equities (GlaxoSmithKline, Imperial Tobacco and FirstGroup) which offer a yield in excess of cash and bonds. In addition, their dividends are growing and provide protection from inflation over the long term.
Funds that offer a yield above that of cash and bonds and good prospects for long-term capital growth include First State Asian Equity Plus, Invesco Perpetual Income and Veritas Global Income.
