23rd September, 2015
Steve Davies, manager of the Elite Rated Jupiter UK Growth
At a roundtable today, Steve Davies, manager of the Elite Rated Jupiter UK Growth Fund, discussed where he is finding opportunities in UK equities today:
“The types of stock I look for fit into two different buckets: recovery and growth. Depending on where we are in a market cycle, the number of stocks in each will vary considerably. Recovery stocks are those that have been all but written-off by other investors. Today I have around a third of the fund invested in these types of company. Growth stocks are those that I believe can consistently deliver strong growth over the medium term and I hold them for a considerable amount of time. Some of these stocks, like Howdens Joinery, L&G and Dixon's Carphone, I have owned since I started managing the fund in 2007 and are still in my portfolio today.
“When I'm deciding what to invest in, I think of the market cycle as having four stages: despair, hope, growth and optimism. Most sectors of the UK economy are in the growth stages at the moment. The exceptions really are commodities, which are still in 'despair', and banks which are in 'hope'. To me, the latter are the only real recovery story we have at the moment – they are still very cheap compared with their own history and profits are improving.
“The question is, will profits be returned to shareholders any time soon? I think they will. Until now, most of the extra money has been going to pay PPI claims and the remainder has bolstered up their balance sheets to meet new regulatory requirements. But the former is tailing off now and Lloyds, for example, has already started paying a dividend again and I think the others will follow. However, as with all investments, there are some risks, including the possibility of more fines, the current review into retail and SME banking, stress tests, which could be an issue for Asian banks, and the full government exit from Lloyds.
“The growth stocks I own fall into three themes at the moment: UK economy, a 'connected world' and the rising wealth of the emerging market consumer.
“The UK economy theme, this is a cyclical theme – one that will only be relevant for a shorter period of time. Employment is near its peak so wage growth is starting. Coupled with a fall in the cost of living, this means the consumer has some disposable income. I believe a modest increase in interest rates could also be absorbed without having a negative impact. More of a worry is what impact the EU referendum will have on business spending. It's OK at the moment but bosses may put things on hold until they know the outcome. This would not be a good outcome.
“An eventual interest rate rise should be seen as a positive – a sign of strength, not weakness. I personally think the US and UK central banks should just get on with it and make the first move. When they do, banks and materials companies in particular should benefit.
“When it comes to emerging markets, I can get exposure through a number of UK listed stocks which have operations or sales revenues in these markets. However, you do need to be choosy at the moment. For example, I don't hold any commodity related stocks or any Asian banks. I firmly believe the oil price will remain low for some time. It may have hit its floor but it also has a ceiling at the moment and I don't see it going much above $65 any time soon. Mining companies are even more distressed but they are not a recovery play just yet. I am keeping an eye on the sector, however, and it may be a theme that comes into the fund in 12-18 months' time.
“Instead, I am investing in stocks linked to the emerging market consumer. I went to China in June on a research trip and my new growth theme is tourism. It is growing and changing and the Chinese are becoming less interested in gaming holidays to Hong Kong and more interested in Japan and Europe. I own Thomas Cook who “have just entered into partnership with a Chinese hotel company. I'm also invested in Merlin. It was too expensive when it floated in 2013 but the valuation is better now and they are opening Legoland in Dubai and Japan in the next couple of years. The Lego brand popularity has gone through the roof in China in the past couple of years and I think these resorts will be a big hit. I also own Manchester United as I am interested in how they can monetise their formidable social media presence around the world.
“Good stock selection, as ever, is key, but there are plenty of opportunities out there.”
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Steve's views are his own and do not constitute financial advice
Sign up to receive our free weekly newsletter.