Increasing aggression on the Russian border, along with the emergence of ISIL in Iraq and Syria, threatened to disrupt investor confidence, while the continuing weak macroeconomic outlook in Europe posed a challenge for companies which rely on these geographies for earnings growth.
“Of greater concern to me is the political outlook for the UK. As a bottom-up stock picker, I am reluctant to spend my time on political analysis but regrettably the highly uncertain outlook for the UK political landscape presents a risk for many companies in my investment universe. As a result, I have been spending some time understanding the various moving parts in next year’s general election and beyond.
“That said, as a bottom up stock picker, I am not inclined to position the portfolio in the expectation of a particular political outcome as I have no reason to believe I can predict this. Today, the UK economy is looking healthy enough for the time being, with the recovery finally starting to show signs of seeping into areas of the economy it has thus far eluded. A number of stocks should benefit from this trend, including Carpetright, and Norcros, makers of electric showers. These stocks have so far performed poorly and I see significant upside should a recovery take hold.
“The large number of companies available further down the market cap scale, coupled with the fact that many are not well understood by analysts and the market in general, means that I have been able to secure a consistent supply of attractive investment ideas in small caps. However, many of these companies have a bias towards the domestic UK economy, so I am balancing the funds with positions in larger, global companies, many of whom are trading at cheap valuations and could benefit from a change in perception. These include companies such as Shell, Wolseley and VW.
“In 2015 I will continue to avoid expensive sectors such as consumer staples, where valuations leave little room for error. One unloved sector which I do see positive change on the horizon is banking, where companies such as Lloyds and HSBC both trade at undemanding valuations and have attractive features which investors have not yet woken up to. As ever, I will be spending my time researching and meeting companies, looking for those that offer some degree of downside protection but also potential for a positive change to show them in a new light. In my experience, this is the best way to deliver the capital growth that my clients expect over the long term.”
