Santander UK Growth Fund: current investment outlook

Richard Moore, manager of the Santander UK Growth Fund, on his current investment outlook.

Richard benefits from the analysis and resource of Santander Asset Management UK’s equity team, headed by John Bearman as well as the extensive resource offered by Santander Asset Management globally.

Says Moore: “I started the year with a relatively cautious view due to the continued risk of recession in the US. Although a state of recession has not been confirmed for certain, it is now not so much a question of whether the US market will experience a downturn but how long this downturn will last and how deep it will be. Whilst the UK economy appears to be more resilient, the credit crunch and deteriorating outlook for consumer expenditure will continue to undermine the market in the short term.

“Food prices have continued to rise and oil prices have moved above $100 per barrel. Other commodity prices have also continued to remain high. Increasing inflationary pressures will continue to squeeze consumer expenditure and increase company input costs. However, the sell-off in the market has left many cyclical stocks on attractive valuations that may be over-discounting the potential impact that the slowdown will have on profitability. So, while the current fund view is to continue in a cautious vein in the short term, I will be taking advantage of these attractive valuations as they occur.

“One recent change I have made is to buy back into the banking sector, where the fund is now slightly overweight. Valuations were relatively low ahead of the reporting season and we have seen a rally since then, with banks further helped by the liquidity injection by global central banks, led by the US Federal Reserve. This has given them more flexibility over their lending in the short term. Longer term, there are still issues for the banks, in terms of slower lending growth and rising bad debts.

“Within the financial sector, I have also increased exposure to the insurance sector, where there are some attractive valuations and less growth issues than exist within banking stocks. In addition, I am keen on the stocks that can take advantage of market volatility, such as MAN Group and Intermediate Capital, for example”.

“The move back into the banking sector has been partly funded by profits taken in our Vodafone position. Vodafone performed well as a defensive stock with exposure to growth markets in the Far East and since we took profits the stock has started to underperform due to rising concerns about its US partner Verizon. I remain relatively keen on the telecoms sector as a whole however and have increased exposure to Cable & Wireless, which is recovering following a period of weakness.

“The fund is still overweight the oil sector but I have moved away from integrated oil companies – selling some exposure to Shell – and into exploration and production companies, which are more leveraged into the higher oil prices. In particular I have bought Cairn Energy, which is producing from oil fields in India, and Premier Oil, which has a good growth profile.

“I firmly believe that food price inflation is here to stay. There are relatively few ways of playing this in the UK – the main one is through food retailers that will benefit from higher prices and I have further increased exposure William Morrison Supermarkets.

“I believe that markets valuations are beginning to discount the worst of the downturn and the expected cuts in interest rates over the coming months will start to flow through to the economy by the end of 08 and I remain positive about the opportunities to buy undervalued stocks throughout the year.”