There are very attractive valuations in the UK equity market particularly in the domestically focused mid-cap space, according to John Baker, manager of the JPM UK Dynamic fund, who argues UK equities are cheap on cyclically adjusted basis.
Anyone holding a defensive UK equity income fund will be pleased to note that 70 per cent of portfolios in the IA UK Equity Income sector have stood up the 2015’s market volatility and stayed ahead of the FTSE All Share index.
However, to have made strong double digit returns you will have had to be in a mid-cap focused portfolio where you typically see higher volatility and more of a domestic focus.
This is largely because the UK economy is providing an ideal environment for earnings growth with robust numbers coming out of wage and employment data and lending to both consumers and businesses, according to Baker, who has co-managed the JPM UK Dynamic fund since March 2007; the eve of the financial crisis.
Here he tips three midcaps stocks benefiting from the UK’s current domestic economic strength.
Aldermore
First up is one of latest ‘challenger’ retail focused banks which has recently seen strong lending growth. Baker says the larger more international banks offer little upside and plenty of headwinds.
“We eschew those investments, and go for one that has a more domestic focus. Aldermore are benefiting from strong growth in the UK mortgage market. The Council of Mortgage Lenders released some data in October that showed that growth lending for mortgages is up 20 per cent year on year.”
“That is very, very beneficial for a company like Aldermore which is growing market share in both ordinary residential mortgages and buy-to-let mortgages.”
Aldermore listed in March 2015, since which it has rallied 29.44 per cent while the FTSE 250 has gained 1.8 per cent.
Performance of stock and index since listing
Source: FE Analytics
“They also have a lot of exposure to corporate lending to small and medium sized enterprises and growth there is also strong because typically they have more of a domestic focus than an international focus. That as an example of the strength of the domestic economy is quite powerful for us,” Baker added.
Lookers
Next up, the manager flags one of his largest mid cap positons in the second largest auto retailer in the UK: Lookers.
“They are experiencing rapid earnings growth at the moment and sales of its cars increasing. Also it is a very fragmented industry and these guys have very strong balance sheet and so are able to acquire competitors and by doing so increase their own market share.
“Also, they are investing in higher return assets than just pure cash.”
Due to a bumper year for car sales as well acquisitions across the country Lookers has seen a record September performance, the company said in its Q3 update.
This has boosted its share price by 38.47 per cent over the course of 2015, more than five times the gain in the index.
Performance of stock and index in 2015
Source: FE Analytics
Just Eat
Indicative of 2015, fast food purveyor Just Eat (similarly to AirBnb, Uber and Amazon) is just a digital market place for curries, fish and chips and other takeaway favourites with no physical kitchens or chefs; but despite this it has seen rapid growth.
After listing on the UK market in 2014, it suffered from a generally bearish run for mid-caps that lasted for much of the year but it has soared since on the back of strong sales growth, and increasing market share.
Since its initial public offering [IPO] it has returned 53.13 per cent compared to a gain of 7.97 per cent from the FTSE 250
Performance of stock and index since IPO
Source: FE Analytics
Baker said: “It is a fairly recent IPO. It is an internet company through which you can order take away food from just about every take away restaurant in the country.”
“It is growing very, very rapidly. Its first half sales and profit where ten per cent ahead of expectations and they are also pushing into other markets as well. They have a significant Canadian presence and are also in several European countries.”
Fever Tree
Last up is swanky mixer maker Fevertree, which listed on the UK market one year ago and has mostly soared ever since. It sold off heavily on Black Monday and throughout the weakness of August but has bounced back rapidly in the past 10 days.
Performance of stock and index since IPO
Source: FE Analytics
“The mixers business is experiencing rapid growth and not just in the UK but also in Europe and North America. The key trend here is that consumers are increasingly looking for premium products rather than standard products. Fevertree is capitalising very well on that,” Baker said.
Over the past three years the JPM UK Dynamic fund, which Baker co-manages with Jonathan Ingram and Blake Crawford, has doubled the FTSE All Share’s 25.12 per cent gain with a return of 53.13 per cent. The average fund in the IA UK All Companies sector returned 35.83 per cent over this period.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
JPM UK Dynamic has a clean ongoing charges figure of 0.93 per cent.