Mark Hall, manager of the UK Select Growth Trust, Rensburg Fund Management, tells MoneyWeek where he'd put his money now.
Markets around the world took a bit of a hit last week, but overall, UK equities have put in a strong performance over the year so far, supported by the low yields offered by bonds and by positive earnings performance from UK firms. In terms of valuations, the market still looks cheaper than this time last year on an earnings multiple of 12.6 times for 2005 falling to 11.5 in 2006, with a yield of 3.4%. That said, a degree of caution is needed when interpreting the data as the FTSE is dominated by two lowly rated sectors, resources and financials, which account for almost 50% of the All-Share weighting.
The global economic recovery appears to be on course, having regained momentum following a soft patch in the spring, but not everything is perfect. The resilience demonstrated by the economy over the past three years has perhaps made investors too complacent about the impact of events such as hurricane Katrina and the spike in oil prices. The impact of the latest rise in energy prices on consumer confidence, on both sides of the Atlantic, is also uncertain and will need to be closely monitored, although, in the UK, the authorities have been sufficiently concerned by the weakness in consumer spending to cut short-term interest rates. In the very short term, however, things look robust and there are investment opportunities around.
The real-estate sector has been a favourite of ours for several years now, and we have been well served by niche players such as NHP (nursing homes), Unite Group (student accommodation) and, more recently, Big Yellow (self storage). Another stock we like at present is Wichford (WICH), which focuses on buying property occupied by Government agencies. The firm's management is currently expanding its portfolio, following a fund-raising, and it's well placed to capitalise on the trend towards outsourcing by central Government. The stock is quite illiquid, but should appeal to income seekers with an initial yield in excess of 4.5%.
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The strong performance of smaller firms over the past few years has clearly been excellent news for brokers specialising in this area of the market. Numis Corporation, for example, has enjoyed a fivefold gain in its share price over the past three years, while Evolution Group has risen fourfold over the same period. Their success has been driven by increasing the number of their corporate clients and by taking advantage of improving markets to raise more funds for them. While we would not expect the market for new issues and acquisitions necessarily to remain as active over the next three years as it has been, we do think there will be opportunities for well-run broking groups. Panmure Gordon (PMR) is one to follow. It's at an earlier stage of development than Numis or Evolution, but we think it will gain market share over the next few years.
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Our third tip comes from a rather more mature and less volatile industry: tobacco. The attraction of this sector is the strength of its underlying cash flows and the potential for excess cash to be returned to investors. We recognise that share prices in the sector are already high, but would argue that there is further to go. We particularly like Imperial Tobacco (IMT). The management has a good track record of delivering returns to shareholders and the free cash yield of 7.5% is attractive given current low interest rates.
