Official statistics have revealed the UK economy grew at its fastest pace since the onset of the financial crisis in 2013.
But not all companies will benefit in the same manner. James Thorne, UK equities manager at Threadneedle Investments explains why equity investors will prove more discerning with their allocations this year as companies’ earnings growth moves into the spotlight…
2013 proved to be a stellar year for most developed stock markets. Central bank liquidity drove returns and investors’ spirits were lifted by the growing prospect of an economic recovery. In the UK, this prospect moved closer to becoming reality today.
However, the recovery won’t translate into a free ride for all. Recent retailer results highlighted a ‘two-speed UK High Street’ and we expect similar wrangling over market share in other sectors. Investors will only reward those companies that can meet or beat earnings expectations while the others will stay on the side-lines.”
The following companies are not only more likely to benefit from the economic recovery, but also have a business strategy that should lure customers away from competitors.
Retailers & Food
The multi-channel strategy is working for retailers as savvy shoppers are shunning big-box supermarkets, preferring to order online or flocking to discounters such as Aldi and Lidl.
- Ted Baker has a strong brand, is exposed to the US recovery and also has a strong position in the UK. It has developed a distinctive and sustainable brand and invested heavily in taking it global.
- Drinks company Diageo should profit from the improved US economy, thus reducing its reliance on emerging markets.
- Online clothes retailer N Brown focuses on niche areas poorly served by the traditional High Street. The latest retailer results demonstrate how profitable a strong online offering can be.
- The growth of online is also driving growth at Paypoint, which operates CollectPlus, the UK’s leading store-based parcel delivery and returns service.
House builders and aerospace
While not yet hitting pre-crisis levels, the US housing sector is recovering and UK mortgage approvals hit their highest level since 2007 in December. An improving outlook should allow a continued demand for construction materials and housing. With oil prices remaining high, the airline industry continues to invest in more fuel-efficient aircraft, while global air travel has been growing.
- Tyman is an international supplier of door and draft excluders that is set to benefit from new building while homeowners are also spending more on refurbishment. Tyman has restructured to cut costs and has been boosted by a recent acquisition.
- Marshalls, the UK’s leading supplier of paving stones and patios, should see demand as a result of the renewed vigour of the UK housing market. Indeed, it released a strong trading update in January with sales picking up in the second half of 2013.
- After enjoying two strong years driven by the replacement cycle for aircraft, aerospace components suppliers such as Senior, Victrex and Meggit should further profit from an uptick in consumer spending that will boost demand for air travel in the US and Europe.
Consumer services and technology
Consumer services, particularly the media, should be winners of the economic recovery, with the World Cup in Brazil further boosting advertising spend.
- In addition, this year should see more companies sending employees to events and conferences. Companies such as DMGT, Euromoney and Informa are exposed these economically-sensitive areas and should see an uplift in demand for their services.
- Close Brothers, which provides small loans to commercial borrowers and car financing, should see greater demand for its services as companies decide to invest in capital equipment. It has delivered very good returns and is underleveraged.
- Britons spending time in shopping malls should boost Restaurant Group, owner of well-known Frankie and Benny restaurant chains. The company has a new format called Coast and has been trading well.
- Technology company CSR provides solutions for Bluetooth items such as the Nike Fuel Band, which measures how much energy the wearer has been using. An explosion in the use of Bluetooth across a wide array of devices should fuel CSR’s earnings growth.
UK stocks rode the wave of confidence and liquidity last year that washed around the world. This year, active equity investors will be looking for businesses that can underpin today’s higher valuations with solid earnings growth. The UK offers a range of opportunities for them.