Emma Wall: Hello and welcome to the Morningstar Series, Why Should I Invest With You? I'm Emma Wall and here with me today is Jamie Hooper, manager of AXA Framlington UK Growth fund.
Hello, Jamie.
Jamie Hooper: Hello.
Wall: So we are going to talk about the domestic market today. This week or last week marks the five year anniversary of the FTSE bottoming out in the debts of global recession and the credit crisis. Things have obviously significantly improved over that time. What changes have you seen?
Hooper: It’s been amazing transformation in terms of investor's perception and certainly more recently in terms of investor's risk appetite. Certainly companies are now in fine fettle. They've aggressively restructured, they have wonderful balance sheets and great options in terms of the use of that cash; and that’s certainly the key to the way that I look to invest.
But if one considers really what's driven the market, I would say three or four simple things. Low starting valuations, economic recovery, huge global liquidity stimulus and very low and subdued inflation which has enabled policy makers to keep interest rates low. Combine those four factors you have a wonderful cocktail for equity investing.
Wall: Sadly, not the sort of perfect storm that we can expect going forward, presumably there will still be growth, but not at that level.
Hooper: We expect more modest gains going forward. I guess one always does after the 20% plus returns of last year and obviously the returns since the lows. A number of clouds are gathering if you like, QE tapering in the U.S. what will the resultant impact on economic growth in U.S. housing. In Europe we think we see deflation; we've moved from severe contraction maybe to stagnation at best.
We look at some of the IPOs that are coming in the U.K., wonderful companies, but at quite frothy valuations. Certainly for some people are now considering interest rates and will there be a policy inflection in the period ahead it's going to be heavily politicised and these are some clouds that we wish to navigate.
Having said that we remain positive on U.K. equities principally because the companies we meet have lots of cash. They are choosing to either reinvest, consider CapEx, often returning capital, but a subtle change in recent times is to consider merger and acquisitions once more.
Wall: Looking then specifically at the U.K. market. Where are you seeing pockets of value?
Hooper: It's key to emphasise here that I am a long term investor. So I am not so concerned about the vagaries of an economic release on a weekly basis. Generally the core of my portfolio will be looking at companies with strong earnings revisions. My long term winners if you like. Those that can give me healthy organic growth, resilient and rising margins, augmented by capital returns.
Examples of companies such as that would be British Telecom (BT.A), or Whitbread (WTB) or St James's Place (STJ) by way of example. There are certain things one can adapt to navigate through these current markets. First try and embrace longer term trends. Growth in the global middle-class, data and the technology cycle, energy efficiency and certainly a key one at the moment is this U.S. industrial renaissance, rejuvenated by the discoveries of shale gas.
Secondly when one looks at my portfolio you would see an exposure predominantly towards U.S and U.K. earnings because they are the developed markets in the economic upturn. And then finally which is a change is embracing some of the mega caps. There is quite a disparity in evaluation between the mid and small caps in the U.K. that have been incredibly strong and some of the mega caps they have lagged considerably over the last few years.
My point here is they have to be cheap and they have to be changing. Be selective but there are some opportunities. More recently I have added money to the mining sector. I think investors will be excited by the capital returns we expect in the years ahead. And also more interestingly AstraZeneca (AZN) which is a pharmaceutical company that certainly is changing its behavior and its growth outlook.
Wall: Jamie, thank you very much.
Hooper: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
