Colin Morton, vice president and portfolio manager at Franklin Templeton, is also looking at the stock level for opportunities. “We are definitely at an interesting point and there are quite a few distortions. Current bond yields are at levels not seen in generations or at all. Equities are attractive because you are getting a dividend yield of excess of 3% and they should grow with inflation over the medium to long term.
“However, we tend to be stock specific because we think the world will become a much tougher place to do business. We like companies like Unilever that are relatively robust and have products that are in strong demand, solid cash flows and strong market positions.”
SMALL BUT MIGHTY
Wouter Sturkenboom, senior investment strategist at Russell Investments Europe, on the other hand, is looking at the smaller end of the equity spectrum. According to industry research, the smaller cap FTSE 250 has outperformed its larger brethren since the turn of the century, as well as in the last five years. Since 2000, the bluechip index has risen by less than 1% while the smaller index has gained 166%.
Unlike the FTSE 100, weightings for resource and banking stocks are pretty non-existent – there are six oil and gas stocks accounting for just 1.12% in the FTSE 250 while seven miners combined make up 1.5% and two banks 0.36%.
“We are underweight UK equities in our global portfolio because of the composition of the market.” says Sturkenboom. “The UK economic outlook is robust but the FTSE 100 doesn’t reflect this. Around 60% to 70% of company earnings are from overseas.
Currency is also having an impact with the pound trading strong against the euro and weak against the US dollar, reflecting ECB monetary policy relative to the Federal Reserve. The steep declines in energy prices, basic materials and industrials are also a negative. The result is we think small cap is more attractive.”
Stephen Macklow-Smith, head of strategy team for European Equities, JP Morgan Asset Management, agrees adding: “We believe there are opportunities within the small to mid-cap sector especially for companies who are exposed to the UK economy. We also expect to see a stream of takeovers due to the low cost of capital.”
For now at least, positive UK growth has buoyed the outlook for domestic equities. However, uncertainty over the general election, potential rate rises and a reduction in QE, as well as the low oil price and geopolitical tensions, mean investors are unlikely to make big commitments.
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