UK equities priced for recession and no recovery

Since the beginning of the year, the investment landscape has been changing. The UK stock market is down but some of last year’s oversold growth candidates are up. The turnaround in some instances has been quite stark, despite no real change in the economic fundamentals.

Part of the reason, according to Sacha Sadan, manager of Gartmore’s £291 million UK Growth Fund, is that the market is beginning to take account of the fact that, while many defensive stocks are backed by defensive businesses, their valuations have become far from defensive.

So far this year, defensive stocks such as Imperial Tobacco, National Grid, Tesco and Unilever have declined sharply, while the results season has served to highlight that some companies classed as cyclical – for example, the engineers, Invensys and Spectris - are, in fact, benefiting from robust end markets and growing well.

Gartmore’s UK equities team has been investing in stocks that overly discount weaker economic conditions, examples being the construction equipment rentals specialist, Ashtead Group, and Travis Perkins, the UK’ s largest builders’ merchant and owner of the Wickes DIY retail chain, as well as selected engineers.

“We see many good-quality stocks as being priced for a severe recession and never to emerge from recession and we’ve built our portfolios to exploit this anomaly,” says Sacha.