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There’s life beyond the FTSE 100, says Newton’s Wilmot

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Richard Wilmot, manager of the Newton Growth Fund, believes opportunities will arise across the UK market cap spectrum, despite the expectation of an era of dampened economic growth.  

George Osborne’s first budget as Chancellor of the Exchequer set out the new government’s plans for a prolonged process of deleveraging, which Newton believes is likely to hamper a strong economic recovery.

These measures will take time, and while liquidity and solvency risks have been partially transferred from the financial system to the sovereign balance sheets, these risks will not disappear overnight.
 
“With economic growth in the UK set to be under pressure for the next few years at least, this environment highlights the desirable characteristics that many large cap companies offer,” says Wilmot. “The main benefit that UK large caps have over their smaller peers is that their end markets are typically global and, therefore, less dependent on economic recovery in a single region or country. Meanwhile, businesses of this sort enjoy powerful market positions and financial strength, their consistent cashflow generation supports attractive dividend yields, and more often than not, their prolonged underperformance over the past few years means that valuations are at low levels.”
 
However, there are inevitable risks. In reality, such businesses can also exhibit equally unfavourable traits; many stocks are potentially too large to grow, while in some cases low valuations reflect deeper structural issues, and these valuations are, therefore, justified.
 
While Newton’s “large cap laggards” theme points to opportunities in undervalued larger cap stocks, Wilmot says there is not a dearth of opportunities further down the capitalisation scale.

“After all, the current economic climate has created scope for high quality smaller companies to gain market share at the expense of their weaker competitors. In particular, we see real value in those niche businesses with exposure to growth areas, especially when they also boast conservative capital structures and experienced management. Meanwhile, there’s the added possibility of such businesses being strategically attractive acquisition targets for larger competitors,” he adds. 
 
While smaller companies are often more dependent on a recovery in economic growth, aggressive cost -cutting and capital restraint at times like this means that there is real potential for upside. That said, smaller companies tend to rely upon their cashflows as a means of expanding and improving franchises, so dividend yield support can be limited.
 
“In the face of tough economic headwinds,” says Wilmot, “we are happy to focus our attention on growth rather than value stocks, and expect to see opportunities aplenty across the UK market spectrum in such businesses.”

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