Cazenove's Julie Dean: UK equities are yet to hit their stride

Julie Dean, manager of the Cazenove UK Opportunities fund , will not let the tension in the Middle East and the horrors of the Japanese earthquake dampen her convicition in UK equities.

She writes:

A glance through the headlines paints a bleak outlook for the UK economy.

The same news makes grim reading for savers too. Interest rates remain low, inflation is rising and the cost of living is surging. About 8% of the UK population are out of work while those who have a job are seeing their pay rise at a slower rate than inflation. Against this backdrop people cannot afford to spend more, holding back economic growth.

To overcome their income gap savers need to ensure, more than ever, that targeting inflation is their principal aim.

Happily, for investors wishing to retain the sterling purchasing power of their assets, the outlook for returns from many companies listed on the UK stock market shines more brightly than the country’s economic outlook. Their good prospects are also not dependent on the maintenance of the high nominal economic growth rates presently enjoyed by emerging market economies.

Since the start of the year, the consensus has moved swiftly and is now less bullish on emerging markets. This predominantly reflects the observation that on a premium price-to-book multiple, emerging markets no longer offer unequivocal value, rather than much doubt that their growth can continue unabated.

Our approach to investment focuses on an assessment of where we are in the business cycle and we select stocks according to the dependency of their earnings to the rate of economic change rather than the mix of their geographic exposure. We see the German and Bric economies approaching a cyclical peak, with the US and the UK yet to hit their stride.

In the former, we are at the stage in the cycle when workers respond to inflationary pressure and peaking corporate profitability with demands for an increased share of it. The extreme looseness of monetary policy across the globe has led to inflation in a number of basic commodities.

Central banks in many emerging markets are already engaged in fighting the difficult battle with inflation and we expect interest rates will rise further than financial markets expect (or the inflation that they are importing will slow down growth rates by more). Inflation is pernicious in all societies but politically worrisome for poorer emerging market economies, as current events show.