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Macroeconomic factors impede return to bottom-up stockpicking

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Fund managers in the UK growth sector believe the UK markets are still highly sensitive to macroeconomic factors which are preventing a return to bottom-up stockpicking, according to S&P Fund Services’ latest review of the sector.

“More positive factors such as low interest rates are offset by the potential inflationary impact of a weak currency, fragile consumer confidence and rising levels of unemployment,” says S&P Fund Services lead analyst Susan Sworn. “Next year there is the added uncertainty of the policy outcome after the 2010 election.”

The volatility of macroeconomic sentiment makes the environment particularly problematic for genuine stockpickers, as top-down sentiment can cause share prices to drop irrespective of strong stock-specific fundamentals.

“Most managers would wish to see the emphasis swing back from macro influences to bottom-up stockpicking,” says Sworn, “but acknowledge that top-down sentiment is likely to hold sway for at least the short term.”

Unsurprisingly, views on the immediate outlook are mixed. On the positive side, Ian McVeigh of Jupiter Unit Trust Managers stands out as having an out-and-out bullish stance, believing that the rally has further to go, and Standard Life’s UK view is optimistic, though more guarded.

The more contrarian investors, having seen their cyclical holdings reach their two to three year targets in a matter of weeks, are voicing concerns that stocks are now pricing in full earnings recovery, and are revisiting, on valuation grounds, some of the more defensive stocks left adrift by the rally.

At the other end of the scale, the more defensively oriented funds that retained their quality stance (underperforming the rally) are convinced that the market will, at some stage, refocus on fundamentals.

“These managers believe that now more than ever is the time to focus on quality stocks with strong management, pricing power, low levels of gearing, and strong and sustainable cashflow generation,” says Sworn.

As part of the annual review, ten funds received upgrades, with one, Standard Life Investment Funds UK Smaller Companies, rising to an S&P Fund Management AAA rating.  Four further funds received new ratings following managerial changes.

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