UK investors have made strong gains from domestic stocks as a result, with the FTSE All Share up 20.81 per cent for the year.
While the market has wobbled in recent days, most commentators expect the year to be a positive one overall.
However, James Thorne, manager of the Threadneedle UK Mid 250 and Threadneedle UK Smaller Companies funds, says that investors will have to start picking winners to make decent gains on their portfolio.
“The recovery won’t translate into a free ride for all,” he said. “Recent retailer results highlighted a ‘two-speed UK High Street’ and we expect similar wrangling over market share in other sectors.”
“Investors will only reward those companies that can meet or beat earnings expectations while the others will stay on the side-lines.”
Thorne highlights a number of stocks that Threadneedle hold and expect to beat their competitors and exceed earnings expectations.
Ted Baker
“Ted Baker has a strong brand, is exposed to the US recovery and also has a strong position in the UK. It has developed a distinctive and sustainable brand and invested heavily in taking it global,” Thorne said.
The company has seen exceptional growth over recent years, returning 242.35 per cent in share price terms over the past three years compared to growth of 28.2 per cent on the FTSE.
Performance of stock versus index over 3yrs
Source: FE Analytics
The company is also a top 10 holding in the Standard Life Global Smaller Companies fund, managed by Alan Roswell with FE Alpha Manager Harry Nimmo.
Diageo
Thorne is also backing Diageo, the drinks comglomerate which owns Johnnie Walker, Smirnoff and Bailey’s among other well-known brands.
The stock grew strongly during the years of crisis in the UK, when selling into emerging markets was seen as the way to make money.
However, as the emerging markets rolled over last spring the company’s shares were hit, and are down since the sell-off in April.
Performance of stock versus index over 3yrs
Source: FE Analytics
Thorne thinks the company can cope, however.
“It should profit from the improved US economy, thus reducing its reliance on emerging markets,” he said.
N Brown
Many UK managers have been looking for retail stocks that are focused on online sales, and Thorne is no exception.
N Brown sells clothes through catalogues and the internet under a number of brand names, including Simply Be, Jacamo and figleaves.com.
“[It] focuses on niche areas poorly served by the traditional High Street,” Thorne said. “The latest retailer results demonstrate how profitable a strong online offering can be.”
The company recorded strong sales over Christmas, with like-for-like revenue up 7.2 per cent over the period.
The stock is up 46.27 per cent over a year, but is more or less flat after the results.
Paypoint
Playing a similar trend, Thorne likes Paypoint, a FTSE 250 listed company held in the top 10 of FE Alpha Manager Harry Nimmo’s Standard Life UK Smaller Companies, Liontrust Smaller Companies and MFM Slater Income among other funds.
The company operates Collectplus, which Thorne describes as the country’s leading store-based parcel delivery and return service.
Growth has been strong in recent years, the company gaining 227.77 per cent to the index’ 28.2 per cent.
Performance of stock versus index over 3yrs
Source: FE Analytics
However, shares are down since their peak in August.
CSR
Another technology-centred stock which Thorne likes is CSR, a FTSE 250-listed stock which has surged over the past two years.
Performance of stock versus index over 3yrs
Source: FE Analytics
“[It provides solutions for Bluetooth items such as the Nike Fuel Band, which measures how much energy the wearer has been using,” he said.
“An explosion in the use of Bluetooth across a wide array of devices should fuel CSR’s earnings growth.”
Close Brothers
One of the more successful financial stocks of recent years has been Close Brothers, which Thorne is holding on to.
“Close Brothers, which provides small loans to commercial borrowers and car financing, should see greater demand for its services as companies decide to invest in capital equipment,” he said. “It has delivered very good returns and is underleveraged.”
Close Brothers has made 73.74 per cent over the past three years, according to data from FE Analytics.