2010 UK market outlook from Cartesian Capital Partners

By David Stevenson, founding partner of Cartesian Capital Partners and lead manager of the Ignis Cartesian UK Opportunities Fund

"For the bulk of 2009, the UK market has been dominated by cyclical and recovery stocks, many of which have aggressively cut costs, particularly through reducing headcount, to protect current earnings and drive future profit margins.

An improvement in sales has to be the next step of the recovery, and upcoming results need evidence of this if leadership is to remain focused in these areas.

Broadening of the recovery: "Previous aggressive market rallies, such as in 2003, have broadened out after the initial momentum phase, with two aspects to this process.

Firstly, recovery plays that sustain earnings progress continue to enjoy investor appetite, while those that disappoint are treated harshly.

Secondly, non-cyclical growth companies that have lagged the rally, regain lost ground as investors spot the undervaluation of their durable earnings.

Stock selection from here should, therefore, focus on companies that can exhibit sustained sales and earnings growth in a post-stimulus environment.

A return to fundamental stock picking: "Although the UK market has been hitting new highs in 2009, there have been recent signs of a change in mix within the overall index.

Mid and small cap companies have lost some momentum after significantly outperforming large cap companies for most of 2009.

Having been the focus for risk and recovery appetite amongst investors, the underperformance of mid and small caps may mark the beginning of a broader market dynamic for 2010.

The recent preference for large cap includes many non-cyclical growth companies which have lagged the 2009 rally, and also internationally exposed companies, which are proving more attractive as domestic sentiment struggles under the prospective tightening of government policy.

All of these factors ought to create a level playing field for growth companies to attract investor attention in 2010, regardless of cap size, sector or cyclical status.

Indeed a 'growth at the right price' investment environment should positively favour fundamentally driven stock picking.

"In 2010 Cartesian will continue to focus on an investment theme of visible earnings, spread across genuine recovery companies and durable growth companies where both are undervalued.

The range of sectors involved is likely to be diverse, but with a leaning towards international plays until the UK economic picture becomes clearer.

Back to top