Is the UK All Companies sector a buying opportunity?

28th April 2015

The AIC UK All Companies sector is underperforming the investment company average over one year, but has seen compelling longer term performance. Here the experts share their views on the sector’s prospects…

The sector is up 56% over three years, 80% over five years, and 176% over ten years, outperforming the industry average over each time period Despite this, the UK All Companies sector is currently on an 11% discount, wider than the industry average of 3%.

A buying opportunity?

James Henderson, fund manager, Henderson Opportunities Trust plc, says: “Company results so far this year have on the whole been encouraging, with cash generation coming through strongly. Despite this strength in company results Henderson Opportunities Trust remains on a double digit discount as investors are risk averse ahead of the election – in our view this presents a value opportunity.”

The election: just one of many influences

Guy Anderson, manager of The Mercantile Investment Trust plc, says: “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. 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 this earnings progression.”

The outlook for the UK

Rosemary Banyard, manager of Schroder UK Mid Cap, says: “Although we are not enthusiastic about the prices of stocks, they are undoubtedly cheap relative to government bonds, where yields are at extremely low levels. Such unattractive valuations of bonds might explain why equities have so far performed strongly since the beginning of 2015, but we also believe the bulls could be too sanguine about the economic outlook. As a consequence we are maintaining a net cash position in the Schroder UK Mid Cap investment trust.”

The effect of oil

Rosemary Banyard, manager of Schroder UK Mid Cap, says: “Real wages in the UK have been given a further boost from the positive effect of moderating inflation, as lower oil prices have fed through to the fuel pump. Supermarket food prices and clothes prices have fallen too, albeit the latter may be the result of temporary weather-related factors. Meanwhile, small and mid-cap companies with overseas earnings could well benefit from the relative weakness in sterling against a resurgent dollar. However, those companies exporting to the Eurozone could be impacted by the strength of the pound against a very weak euro in response to the ECB’s actions.”

Guy Anderson, manager of The Mercantile Investment Trust plc, says: “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 sectors. 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. Conversely, we believe that the market is still underestimating the risks to earnings at oil producers and oil services companies, where existing hedging policies and contracts may be masking the underlying fundamentals.”

Share price total return on £100 lump sum – AIC UK All Companies sector

1 year

3 years

5 years

10 years

Overall Weighted Average

112.11

142.18

164.04

259.39

UK All Companies sector average

99.75

156.16

179.61

276.41

Aberdeen UK Tracker

104.57

135.11

152.79

210.26

Artemis Alpha Trust

89.88

101.74

111.65

145.73

Aurora

94.11

90.61

89.73

88.49

Capital Gearing

101.71

112

132.4

186.38

Crystal Amber

97.59

166.61

140.29

Fidelity Special Values

99.31

178.78

181.42

266.11

Henderson Opportunities

99.67

207.43

260.39

Invesco Perpetual Select UK Equity

113.94

192.48

237.77

JPMorgan Mid Cap

100.89

198.33

244.49

301.15

Keystone

108.49

162.27

207.69

313

Manchester & London

96.98

89.62

95.95

128.08

Mercantile

100.61

165.32

189.96

309.82

Schroder UK Growth

92.16

136.08

156.34

220.37

Schroder UK Mid Cap

88.98

174.12

243.65

380.15

Threadneedle UK Select Trust

99.91

154.22

157.17

246.25

 

 

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