Telecoms, financials and healthcare stocks are the most attractive areas of the market for investors in 2016, according to star manager Stephen Bailey (pictured). 
The FE Alpha Manager ‘Hall of Famer’, who runs Liontrust’s Macro UK Growth and Macro Equity Income funds, says that there are a lot of advantages to taking a top-down view to investing, and that these are likely to manifest themselves this year.
“Last year was a pretty volatile year and it was a year of waiting. We were waiting for the election, we were then waiting for the outcome of the Greek crisis, then we were waiting for China to resolve its issues, and of course the markets ended up going nowhere, sideways at best,” he said.
Performance of index in 2015
Source: FE Analytics
Because of the potential challenges the UK economy is facing, the manager believes there is every chance that the Bank of England won’t tighten policy at all this year, and is very unlikely to do so in the first half of the year.
“While we see a sustained period of very low interest rates, I think it will be quite supportive for other means of investment and I think equities as an asset class will still look excellent value,” he said.
“It’s very hard to be particularly bullish when there are so many areas of the market that we’re not that keen on, but I think I would regard ourselves as being selectively bullish.”
Areas of the market that the manager has been avoiding include tobacco, oil and mining as a result of low dividend covers and few growth opportunities. However, Bailey says they are still plentiful opportunities for investors in the sectors listed below:
Telecommunications
Telecom, media & technology is the third-largest sector weighting in both of Bailey’s macro funds, as he believes the outlook for this area seems to be “exceptionally positive”.
“If you look at the amount of data we’re consuming and not just in the UK but globally, it’s increasing exponentially,” he explained.
“[Multi-national tech company] Cisco Systems has actually forecast that, for the next five years, the combined annual growth rate for data consumption will increase by around 57 per cent.”
“You can see the opportunity is there, and obviously what you now need to see is that opportunity converted into monetisation.”
One of the reasons that the star manager is attracted to telecommunications is the free cash flow that is often generated, which he says allows stocks such as BT to generate top-line growth.
Not only this, he says that for some telecom companies such as Vodafone, most of their capex is likely to have already peaked which means investors are likely to be more generously rewarded.
“A lot of the infrastructure spending at Vodafone has already happened, and it has just completed its ‘Project Spring’ investment, which was essentially infrastructure spending,” he said.
“A lot of this spending has now occurred, and if we look at increasing the top line, we’re very optimistic that Vodafone will grow its free cash flow quite substantially over the next couple of years.”
Similarly, Bailey says that telecoms giant BT has estimated a dividend growth of 15 per cent per annum over the next three years, which he says is a huge positive for those seeking income.
Performance of stock over 3yrs
Source: FE Analytics
Financials
The financials sector, which is Bailey’s largest weighting in both funds, often divides investors as some believe that as an area it is opaque and untrustworthy.
However, those who are keen on the sector argue that this reputation is derived from 2008’s banking crisis, and the manager says that it is companies involved with saving and investments that he is particularly bullish on at the moment.
“We obviously have a government that has recognised the demographic challenges that we have in the UK with an aging population,” he said.
“They therefore need to shift the onus away from the government balance sheet and encourage individuals to save for their own retirements, and we’ve now seen the introduction of the work place pension. It’s going to take a while for this to gather critical mass but we think it’s a step in the right direction.”
The manager believes that there will also be other instances to encourage people to invest, and points out that 2015 already saw the increase in the ISA allowance. As such, he thinks today’s investment and savings environment is set to benefit from this level of political encouragement.
“Another aspect of savings and investments which we think is positive is the shift away from defined benefit pension schemes and towards defined contribution schemes,” he continued.
“Most companies have now closed their defined benefit schemes and, if they haven’t closed them, they’re not accepting any new entrants.”
“Of course defined contribution schemes are rapidly increasing through initiatives such as the workplace pension. What this means is we’ve seen the massive selling down of equities over the last 15 years where defined benefit schemes have been selling equities to replace them with fixed interest stocks so they can go into liability matching, and it’s now changed.”
As a result of this, Bailey believes that the UK will see greater numbers of people buying equities institutionally over the next few years, and is aiming to utilise this in his portfolios through holdings in stocks such as Aviva and L&G.
Pharmaceuticals
Both the Liontrust Macro UK Growth and Liontrust Macro Equity Income funds are allowed to hold up to a 20 per cent weighting in overseas equities, and Bailey is currently utilising this through holdings in US pharma stocks.
“Since 2009 we took the view that we’d rather own dollars than sterling. Both currencies were trying to devalue themselves in order to get more competitive on a global basis, but we felt that in the ‘least ugly’ contest that dollars would be better than sterling,” he said.
“These dollar stocks are drawn from two themes: firstly the pharmaceuticals. We’re very keen on pharmaceuticals. We think they have a very valid role to play currently, but that hasn’t always been the case.”
The manager says there has been a significant change in political attitudes towards the pharmaceutical industry as a result of increased awareness of various illness and diseases.
However, he also adds that illness prevention is coming to the fore, following economist Jim O Neill’s call for large pharma companies to resolve the ‘antibiotics crisis’ in 2014.
“As we’ve seen with O’Neill’s paper, we do have huge issues in certain areas, and the government needs to encourage pharmaceuticals to go back to their laboratories, and also to be coming up with new drugs to combat new illnesses,” Bailey said.
“We think this shift in political awareness and priorities is paramount and we think it’s not just about national health, but about protecting global health.”
Performance of stocks over 3yrs
Source: FE Analytics
UK stocks the manager is playing this theme through include FTSE 250 company Vectura and pharma giant GlaxoSmithKline.
