With consumer confidence at its highest in four years in Q3, Garraway Capital Management's David Urch highlights his key stock picks
Amid what remains a subdued UK economic recovery - but contrasting with a vastly uncertain global picture - owning domestically focused companies that are able to compound their growth rates over and above current, modest, GDP levels, should see investors rewarded. At a sector level, we have been finding attractive operational momentum in consumer discretionary companies.
Employment is at its highest since 2008, wage inflation is slowly creeping up (though not as quickly as many economists have anticipated), and prices are low.
This is a good mix for consumers, who are also helped by the likelihood that interest rates will remain at 0.5% until at least May 2016, according to the latest consensus forecasts.
Perhaps it is no surprise then that consumer confidence, as measured by Deloitte, was at its highest in four years in the third quarter.
At a stock level, kitchen company Howden Joinery exhibits the strong operational momentum and cash generative characteristics that we seek to identify and harness.
Should managers stay exposed to consumer spending?
Provident Financial meanwhile, a lender to people who have difficulty accessing traditional high street credit, should remain in a good position as employment rises.
Since last year, our macro analysis has been pointing us towards infrastructure as an investment theme in the US and UK.
With George Osborne's announcement of the creation of a National Infrastructure Commission, we expect to see fresh impetus in this sector, perhaps some positive re-ratings, and new opportunities coming onto our radar.
A 'lost generation' helps boost housebuilders
We have already identified strong earnings momentum in a number of companies in this sector, including plant hire business Ashtead and building materials supplier CRH, among others.
Though some have had a torrid time recently, we think housebuilders remain attractive and can still surprise on the upside as the fundamentals that underpin the sector remain strong. Barratt Developments, yielding a very attractive 4.8%, is a highlight.
We are also alive to the prospect of opportunities elsewhere, particularly in some of the more oversold sections of the market.
David Urch is manager of the Garraway Capital Management UK Equity Market fund
Bull Points
• Consumer cyclical companies continue to be supported by favourable fundamentals
• The creation of a National Infrastructure Commission augurs well for infrastructure-related businesses
Bear Points
• The pushing back of forecast interest rate rises in the US and UK points to deeper concerns about slowing global growth
• Deflation is a concern, domestically and globally
