With the UK stock market bracing itself for a period of uncertainty in the wake of the General Election, rather than make speculative moves many investors are adopting a holding position until the outcome is decided.
This indecision is likely to continue, the manager of the Mercantile Investment Trust believes, until corporate earnings begin to catch up.
Anderson said: “Given broader macroeconomic uncertainties and currently elevated valuations, we expect that overall market levels are unlikely to make more meaningful progress until we see evidence of earnings progression.”
“At the company level, dividends have steadily been returning to health as corporate balance sheets have strengthened,” added Jamie Forbes-Wilson, manager of the AXA Framlington Blue Chip Equity Income Fund.
“The main worry for equity income investors is the fact that we are yet to see a sufficient increase in company earnings to justify current market valuations.”
With the election outcome still wide open, taking a sector-based approach is for the most part susceptible to the respective party mandates – except, Anderson says, consumer services.
He said: “The upcoming General Election may be hugely significant for the UK and the UK market, given the wide range of outcomes and potential implications for specific companies and industries.
“However, the election is just one of many factors influencing the stock market, and over the long-term we believe that the underlying strength of the UK economy, the diversity of UK corporate earnings and a number of company specific drivers will support continued earnings progression.”
Anderson cited falling commodity prices, low interest rates and the first bout of real wage growth for five years as likely to push consumer discretionary spending upwards, leading to the sector pulling away from the rest of the market.
“The reduction in oil prices since last summer is only now beginning to be felt by companies and consumers, and this may lead to a dislocation in the performance of different sector,” he explained.
“We are incrementally more positive on consumer cyclicals, where earnings growth should accelerate as a result of consumers experiencing real wage growth for the first time in five years.”
This conviction is reflected in Anderson’s portfolio, where consumer services represents 28%, against the FTSE All Share ex-100 ex-IT index average of 20%, alongside a 7% overweight to domestic stocks compared to the FTSE 250 median of 48%.
He said: “In March, family spending power was up 9.7% year-on-year, and in the absence of increased saving rates these factors indicate an increase in consumer spending.
“Our largest overweight is in consumer services, predominantly driven by an outsized exposure to the retail, travel and leisure sectors. This is reflected in our overweight to the UK against international exposure.”
