Outlook 2015: UK equities

Share valuations remain close to their long-run average, which gives us comfort in the market's aggregate level. We believe value still exists within the domestic banks and house builders.

Having delivered a broadly flat performance in 2014, the aggregate valuation of the market has not changed significantly. The market expects low single digit earnings growth in 2015, which is slightly lower than had been anticipated for 2014 a year ago. Earnings expectations have been scaled back during the course of 2014 and projections for global growth cut.

Share valuations remain close to their long-run average, which gives us comfort in the market's aggregate level, and it is possible to find relative value in certain cyclical sectors that have de-rated in 2014. In general, risk and reward appears to be more broadly balanced than in the recent past. The prospects for the market's more domestically-focused companies remain reasonably positive. Falling unemployment and signs of real wage growth coming through should support the British consumer and interest rate rises, when they materialise, have been well telegraphed and are likely to be relatively small.

Challenging times

Many challenges face the global economy, not least an uncertain Chinese growth outlook and the spectre of deflation in the eurozone. The recent dramatic decline in the oil price could further support growth. By contrast, this time last year the emphasis was very much on monetary tightening as the US Federal Reserve prepared to taper its quantitative easing (QE) and markets fretted about UK interest rate rises. The market is particularly pessimistic about Europe, where we should see additional stimulus measures in 2015, and Japan has bolstered its own unconventional monetary policy drive by extending QE.

The consensus view is that the modest level of global growth will persist into 2015, with the eurozone the major culprit again. Indeed, the latter's structural problems remain unsolved, while sentiment in Germany has been more negative than expected as a result of the Russia/Ukraine conflict.

The broader market is not cheap, but equally it is not excessively expensive. Following the de-rating of the more cyclical elements we see some relative value again in certain more cyclical companies. The media sector also catches our eye, including Daily Mail & General Trust and the FTSE 250 events companies Informa and UBM. Similarly, the software sector is presenting interesting opportunities with IT infrastructure services business Computacenter worth highlighting.

Conversely, some of the more defensive companies with more resilient earnings streams have rerated strongly in 2014.  We remain happy to hold such businesses – including Imperial Tobacco, publisher and information provider Reed Elsevier and medical equipment group Smith & Nephew – but are aware of their increased valuations and so may recycle money out of such areas.

Domestic winners

Among the UK-focused companies, we believe that value still exists within the domestic banks and house builders, despite the latter being among that small cadre of companies to have benefited in the past year from earnings upgrades. However, it is worth bearing in mind that the general election in May could prompt volatility among the house builders, gambling companies, bus and rail operators and utility firms, all of which are potential targets for political interference.

The securities and sectors shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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