How can investors play the slow UK economy?

I have always questioned the rationale of an 'ISA season' per se given that 'following the herd' is not always a good idea, but clearly the herd can drive up prices. However, this year that last minute ISA application might have been a canny move, because the ‘summer lull’ never quite happened.

Whilst June was a subdued month, in July the FTSE All Share rose 8.5 per cent on a total return basis, and is up some 35 per cent since the lows of early March – pretty good going, and something you wouldn’t want to miss out on given the current low interest rate. The investment company sector was up 6.2 per cent in July, but remains some way ahead of the FTSE All share over the year-to-date, up 13 per cent compared to a 9.4 per cent rise in the FTSE All Share.

Yet whilst this stock market momentum was helped along by some better than expected results both at home and abroad, the latest Bank of England Inflation Report suggests the UK is set for a slow recovery. The recession appeared deeper than expected, with GDP falling further in the second quarter of 2009. Other factors the Bank thinks likely to hinder a recovery are credit conditions, which are expected to remain tight, not to mention past falls in asset prices and the high levels of public and private debt weighing on spending. Whilst the Bank of England expects a slow pick up in economic activity, it is uncertain of the timing and strength of that recovery. Meanwhile, latest figures from the Office for National Statistics puts the latest unemployment figures at £2.4m, the highest since 1995.

So where does this leave investors? Clearly the importance of a balanced portfolio is extremely important, and although the market is currently shooting up some investors may well be taking a look at some of the more 'defensive' sectors. The term defensive is of course hard to define, but at a time when banks are paying record low interest rates, investors are increasingly looking for ‘defensive’ companies to invest in that will provide an income. Both utilities and infrastructure are two investment company sectors which are seen as defensive and aim to provide income. Indeed both sectors provide services that are essential to the functioning of society and economic growth. They are mainly capital intensive businesses which have the potential to provide reliable growth over the long-term.

John Murray, Chairman of Ecofin Ltd, managers of Ecofin Water & Power Opportunities said: "Utilities are among the most oversold of all the major industrial sectors. The sector is as cheap as we have seen it since 2003, if not earlier. Unlike in 2003, the fundamentals of the global utility sector are generally sound. Balance sheets are in relatively good shape and the utilities are proving that they are able to access long-term capital markets. The credit crunch has been a non-event for utilities, which have benefited from a flight to quality in the bond markets. Utilities in Europe successfully sold a greater volume of bonds to investors in the first quarter of 2009 than they did in all of 2008."

Speaking at a recent AIC roundtable, Giles Frost, a director of International Public Partnerships Limited was optimistic about the outcome for the infrastructure sector generally and particularly for those parts of it less affected by macro-economic factors. He said that government spending on infrastructure will not fall dramatically in a recession and that government backed infrastructure projects are stable investments that can be anticipated to provide a regular income stream for investors.

Annabel Brodie-Smith is Communications Director at the Association of Investment Companies (AIC). The views expressed here are her own.