Profits and earnings growth for UK companies will be in the 'high single digit' range in 2005 according to Nigel Lanning, manager of the Allianz Global Investors UK Equity and Income fund.
Lanning, who has also manages the £500 million Merchants investment trust, said that share buy backs based on good cashflows would buoy earnings and dividends issued by UK companies of around the 7-8% region would be feasible.
'With sluggish growth, interest rate expectations can be expected to continue to fall,' said Lanning. 'Thus banks, builders and retailers might do well. The latter have already been a target for buy-outs and, with cheap long-term debt, this may remain the case. Other stable, well-financed companies may also be targeted.'
Lanning's UK Equity and Income fund has endured a tough 2004, returning 3.8% in the eleven months to the end of November while the average fund in its sector delivered 6.4%.
Over the longer term, since Lanning took over management of the (Allianz Dresdner UK Equity Income A Inc) fund in the spring of 2001 his fund has lost 3.9% - better than the 5% loss posted by the average fund in the sector.
On interest rates Lanning, who recently lost his Citywire A-rating, said he believed that UK base rates had reached the top of the cycle. 'Rates will continue to rise in the US but possibly at a slower rate than futures markets are discounting,' he said. 'UK base rates have almost certainly peaked at 4.75%, whilst the upside in Europe appears very limited in the medium term. This is good news for equity valuations overall.'
Taking a rather contrarian view on the weakening US dollar Lanning said: 'Many say forecasts for currencies are only made by fools and charlatans. My instinct, given that there are so many bears of the US dollar, is that it might be the currency of choice for 2005.
'Don’t forget that sterling/dollar was about 1.40 three years ago. The dollar has already fallen a long way and the US remains the home of capitalism. This is a low quality forecast but it would be good for UK shares in general.'