Mark Dampier: Are we ready to share the wealth again?

The Analyst

The last eight weeks have seen an incredibly strong rally in global stock markets. For example, since the Standard Life UK Equity Recovery Fund (which I have featured in these pages) launched in early March, it has risen by 50 per cent. That's an astonishing move in such a short space of time, but I would urge investors to not get carried away.

I find it hard to believe that markets won't pull back again and, in my opinion, extreme pessimism has given way to unfounded complacency. Despite this I remain a fan of equity income funds, particularly as interest rates are likely to stay low for quite some time.

The JO Hambro UK Equity Income fund has a realistic yield of approximately 6.3 per cent, in the opinion of its manager Clive Beagles, which includes the prospect of dividend cuts of around 10 per cent during 2009.

The recent move in the market has been led strongly by cyclical companies – those whose fortunes are more closely tied to the UK economy. Clive Beagles felt that analyst forecasts were so dire that companies only had to perform marginally better in order to give the market a positive surprise, which seems to be what is happening.

While the UK's economic situation is serious, he believes we will come out of recession relatively early for three reasons. Firstly the UK has the highest number of variable rate mortgages and therefore the domestic market is hugely affected by the reduction in short term interest rates. Anyone on a tracker mortgage has had a lot of money put back in their pockets over the past year. Secondly we have seen a massive devaluation in our currency (far greater than we saw in 1992 when we were unceremoniously dumped out of the ERM) which makes our exports more competitive.

Finally, the UK only contains five banks, which he argues now appear to have been largely sorted out, whereas in the US they have 6,000 banks that are certainly not out of the woods.

There are several key themes that Mr Beagles has running through the portfolio. One tactic, which others are also warming to, is to focus on companies that are benefiting from their weaker competitors going bust. Surviving firms have, by default, got a much bigger market share. This includes insurance following the demise of AIG, packaged holidays like Tui Travel, and music retailer HMV which has profited from the death of Zavvi and Woolworths.

Some companies are also able to benefit enormously from interest rates that are virtually at zero, including commercial property companies such as British Land and Land Securities.

Mr Beagles is also underweight traditional defensive companies on the belief that their valuations are at a historic high. This is interesting as many other managers believe that they look extremely cheap – as the saying goes, that's what makes a market.

Mr Beagles is also underweight oil, with the exception of a decent position in BP. The portfolio does have a slight tilt towards cyclical areas, which has certainly been the area of the market that has been very profitable over the last few weeks. Plenty of companies are up by more than 100 per cent, but Mr Beagles hasn't been afraid to sell shares when they have given him a healthy profit, despite not generally being a short-term trader.

I must say it makes a change to see a more bullish fund manager, who strongly believes that shares are cheap versus bonds. My own worry centres more around the fact that I don't believe this is quite the same as the start of the bull market in 2003. Although the world economy does seem to have avoided an Armageddon scenario, which at least justifies some kind of market rally, it just feels like too much too soon for me.

However, the one glorious thing about an income fund is that, while the capital will fluctuate, the income will offer a healthy boost to your return and even accounting for dividend cuts the JO Hambro UK Equity Income Fund offers a superior income to most other types of investment.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent