Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Nigel Thomas, manager of the AXA Framlington UK Select Opportunities Fund.
Hi, Nigel.
Nigel Thomas: Good morning, Emma.
Wall: So, on the face of it, it doesn't look like there is much going on in the U.K. stock market if you just look at headlines. The headlines are very involved with China and Greece. But the U.K., of course, is not just a domestic market. It is a global market and those things that happen outside the U.K. can affect the U.K. stock market, can't they?
Thomas: That's right. We're seeing very good dividend growth in the U.K., which you don't see in the headlines, but very strong dividend growth, especially from the FTSE 250 companies. I think we are expecting dividend growth of 8% this year from the total U.K. equity market. There is a lot going on in China, the slowing down in China.
I was visiting Shanghai in January. I went to a conference and visited about 11 U.K. – subsidiaries of U.K. listed companies, companies like Michael Page, Saatchis, Rotork and companies were seeing a slowdown. Spirax-Sarco had actually seen overcapacity not only in the property and construction market – a lot of empty apartment blocks, but also in the food and drink industry there's overcapacity. So, the slowdown there is affecting some U.K. companies and obviously, commodity prices are quite soft as well.
Wall: Of course, our biggest market in the U.K. is Europe and there has been an awful lot going on in Europe as well but that seems to have turned the corner and looking positive because Greece is such a small part of that European market. So, presumably growth in Europe positive for U.K.?
Thomas: Yeah, I think we are starting to see growth shoots in Europe that maybe we've had the supply side reforms in Portugal, Italy, Spain, you are now seeing some signs of growth, even the Italians are going to de-nationalise part of their postal service. So, there are signs that the supply side reforms are going to work and come through into the GDP growth numbers.
Wall: You mentioned there at the beginning that we've seen this dividend growth in the FTSE 250 space. Over the last 5, 10 and 15 years the FTSE 250 has outperformed FTSE 100 and FTSE Small Caps excluding investment trusts. Is this something we can expect to continue and continue?
Thomas: I believe we've got some super companies capitalised around £1 billion mark and I add value in my fund through investing heavily into the FTSE 250 and a lot of the companies I've got in the FTSE 100 were in the FTSE 250. So, companies like ITV, Travis Perkins, St James's Place, they were one of the FTSE 250 and now FTSE 100 companies.
Wall: So, would you say then China is perhaps the only cloud in an otherwise sunny sky?
Thomas: Well, we are waiting for the Federal Reserve to may be move rates higher. That could happen in the Autumn and then the Governor of the Bank of England has also indicated rates might go a bit higher in the U.K. around Christmas time or the New Year.
And certainly 10-year bond yields are yielding about 2.1% in the U.K., so that's indicating that rates will start to normalise over the next few years.
Wall: So, that's a good thing or a bad thing?
Thomas: Well, normally bad thing for equity markets, rising interest rates, but it is very small steps going from 0.5% to 2% over the course of two or three years and I think that will be absorbed by equity markets.
Wall: And it's not exactly a shock, is it? We're getting lots of warning.
Thomas: We are getting lots of warnings. I think if the U.S. Fed is looking at evidence-based numbers of their economy, if it doesn't come, if the numbers don't come through very strong then their rate hikes could be delayed as well.
Wall: Nigel, thank you very much.
Thomas: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
