The groups UK Growth and UK Aggressive fund manager says he continues to see value in the market, although he expects the FTSE to grind upwards with considerable volatility in what will be another difficult year for investors.
‘Sectors in which, I believe, there are ‘rich pickings' to be found include UK consumer cyclicals, financials (principally insurers and asset managers) and telecommunications,’ he said.
The electricals retailer has re-engineered its cost base and revamped its stores in what has been a fundamental overhauling of the business, Walker said. This has helped it to be able to compete with internet retailers, such as Amazon, on price and this is now being reflected in the terms it is able to negotiate with suppliers.
‘The UK consumer environment is likely to be significantly enhanced by the group's market share gains brought about by the demise of its biggest competitor, Comet,’ Walker said. ‘With sales on an improving trend, operational gearing within the business should allow for earnings to grow significantly faster than sales.’
The telecoms company is less exposed to consumer belt-tightening and Walker said it is succeeding in offsetting declining voice revenues with new data services and he expects BT to strip out further costs from the business.
‘Even after topping up its pension pot, the company's cashflows are prodigious and more than capable, I believe, of supporting a growing dividend from here on,’ he added.
Walker’s long-term bullishness on the market gives him confidence that Schroders should be able to grow its earnings in excess of the UK stock market average due its operational gearing.
‘Given that fund managers charge a fixed percentage on their assets under management, a large proportion of every incremental pound of revenue which they receive falls directly through to the bottom line,’ he said. ‘With over £1 billion of surplus cash on it, Schroders' balance sheet is extremely low-risk in my view.
‘I favour the non-voting shares as they trade at a significant discount to the ordinary shares. Once the cash is stripped out, the stock is trading on a P/E multiple of 9.5 times expected 2013 earnings.’
In keeping with his backing of non-bank financials, Resolution is another stock that should benefit from longer-term stock market growth. He points to the insurer’s healthy 8.3% yield and notes its large group pensions division should benefit from its operational gearing, much like Schroders.
Over three years to 15 January the Invsco Perpetual UK Aggressive fund has posted growth of 36.4% compared to an IMA UK All Companies sector average return of 27%. The UK Growth is up 21.1% over the same period.