Frikkee, lead manager of the Smith & Williamson UK Equity Income Trust, believes that UK consumption is primed to rise on the back of real wage growth that has begun to make itself felt,. Subsequently, she has gone into the New Year with 25% of her portfolio dedicated to consumer cyclicals.
She said: “I think this will be another year for the stock-picker, because the whole market will not make an awful lot of progress until we know where we are on oil and other commodities.
“I am positive on consumption,” Frikkee continued. “The UK will benefit from more disposable income for the consumer. I am very overweight in UK consumer cyclicals such as travel, leisure and retail – the food war will help, and I think that part of the market has a lot of growth potential.
A large part of the £41m vehicle is also exposed to the rising US dollar, which Frikkee believes will continue to strengthen.
“The other side, which is linked to the commodity prices, is the strengthening dollar, which about 22% of the portfolio benefits from,” she said. “There is still quite a bit of momentum to come, it won't necessarily pick up speed, but it will keep going in the same direction.”
But while she is confident in her position regarding the majority of the portfolio, Frikkee is more wary of her weighting to UK utilities, which she conceded are exposed to domestic volatility related to the general election.
“The biggest risk in my portfolio regarding the election is the overweight position in utilities, which is about 9%,” she explained. “I think the political posturing over the price of oil at the pump will carry on, which can hurt share prices, but prices for consumers will not match the politicians’ forecasts. So there is risk coming from headlines in the media and there will be more volatility than there should be.
“Utilities could very well be the whipping boy, because it is easy for the consumer to see that the oil price has come down and therefore think that energy prices should come down, but the fundamentals are very different. Politicians may say that prices will fall, but I don’t think it is legal for the government to break contracts with the providers.”
However, while Frikkee believes there are risks, she is fairly confident that increased consumer spending could offset drawbacks imposed by political wrangling over commodity uncertainty.
“I expect to see an increase in volatility until the election, when things will even out a little. But I see that volatility as a positive because the total return in the long-run will be determined by losing less.
