The fragility of the UK recovery and high levels of Government debt means 2010 is likely to be a far trickier year for UK equity investors than 2009, according to
Legal & General Investment Management (LGIM).
LGIM Equity Strategist, Georgina Taylor says that, last year, UK equity investors were rewarded for choosing to invest in equities, almost regardless of which part of the market they placed their money.
This, she says, was because equities staged a broad-based recovery from March 2009 onwards following the heavy sell-off that occurred as a result of the credit crunch.
Predicting a more subdued economic outlook in 2010, Taylor explained that equity gains for the market as a whole are likely to be far more modest. However, she also distinguished between the economy and the equity market.
The risks facing UK companies include the fragility of the UK’s economic recovery, high Government debt levels, pushing up the ‘risk free rate' and a rise in the cost of capital across the private sector.
Despite these risks, Taylor stated there would be opportunities for attractive returns from those UK companies who have pared costs during the downturn and are now likely to be highly cash-generative.
In addition, larger companies with greater exposure to the expected higher growth emerging markets are likely to outperform.
"It is important also to note that the UK equity market performance is no longer simply dependent on the UK economy,” said Georgina Taylor.
“More than 70 per cent of UK FTSE 350 company sales now come from outside the UK. So the fortunes and earning power of UK companies are greatly influenced by factors such as the strength of the global economy and the value of sterling."
"Where, as in 2009 it was a case of just investing in the market, spotting these companies will be the key to earning good investment returns in 2010."
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