A UK stock market recovery in the second half of 2009 is the consensus forecast from brokers and fund managers, as low interest rates and low equity valuations help investors regain an appetite for risk. But all warn that stock-picking will be key, as some sectors will deteriorate.
“Bankruptcies will increase in 2009,” predicts Mick Gilligan, head of research at brokers Killik & Co. “But the stock market has already discounted a considerable amount of distress. In 2009, we expect equities will attempt to defy the gloom.”
Martin Walker, manager of the Invesco Perpetual UK Growth fund, agrees. “Much of what we have described for the economy is already priced into equity market and, since markets generally turn in advance of the economy, we believe it is very possible for the UK stock market to end 2009 higher than at the start.”
This optimism is being fuelled, in part, by US and UK stimulus packages. “Not only have we witnessed the biggest financial upheaval of our time, we are also witnessing the biggest policy response of our time,” says Mike Lenhoff, chief strategist at Brewin Dolphin. “This should help support valuations in equity markets, which are more attractive today than at any time since the early 1980s.”
Against this backdrop, fundamentals-based stockpicking should start to work again. “2008 was notable for a collapse in the link between earnings and share price performance,” says Tim Steer, manager of the New Star UK Alpha Fund. But, in 2009, “investors who invest in companies with solid fundamentals will be proven right in the medium term”.
Henk Potts of Barclays Stockbrokers says that share prices should recover “as risk appetite returns”. He expects the FTSE to trade on a price/earnings ratio of just over 10 times, and offer a dividend yield of more than 6 per cent.
This, in a year when the base rate could fall to 1 per cent in the first quarter, will bring buyers back to the market, suggests Jeremy Tigue, manager of the Foreign & Colonial Investment Trust. “Those with reasonable sums in bank accounts realise that this translates to practically no income from their savings,” he argues. “As investors move away from safe investments towards higher risk, they should expect the returns to go up. Equities should command higher returns.”
Investors seeking these returns still need to focus on lower-risk sectors. Invesco Perpetual’s Walker says: “The prime candidates include pharmaceuticals and, if risk appetite returns, special situations, such as GKN and Wolseley.”
Killik & Co also favours defensive holdings. “We would recommend companies with visible earnings,” says Gilligan. “The pharmaceuticals and tobacco sectors contain good examples: AstraZeneca, GlaxoSmithKline and Imperial Tobacco.”
With volatility likely to continue, he also favours stocks that can participate in the rallies, but “where we won’t lose our shirt if the upturn proves shortlived”. He recommends Vodafone and Cobham, or funds that aim for capital preservation, such as Jupiter Financial Opportunities, Odey European Income and Cazenove UK Target Absolute.
However, some managers warn against defensive “overkill”. Bill Mott, manager of the PSigma Income Fund, says: “The chances of economic recovery now appear greater while the valuations of stocks in economically-sensitive areas – retailers, engineers, pub operators – are very low indeed.” He is not alone. Sanjeev Shah, manager of Fidelity’s Special Situations fund, sees likely gains in consumer services and consumer cyclicals, and has positions in Provident Financial, BSkyB and Pearson, which owns the Financial Times.
