As most of you will be aware, stock markets have rallied strongly since the beginning of March. This is certainly a welcome change, but I wouldn't be surprised if markets paused for breath at this stage. Whether or not this rally can be sustained is the big question in investment at the moment.
I remain positive on the long-term potential of shares, but I'm far more cautious about the short-term outlook. It seems to me that a lot of highly cyclical, highly-indebted companies have gone up a long way, despite little evidence to suggest that their situation has materially improved.
Furthermore, my opinion is that we are seeing a dead cat bounce in the housing market. A bit of a bounce was inevitable, and it would have been catastrophic if we had not seen some increase in transactions, but this does not mark a new dawn. Houses still look far too expensive, especially considering that unemployment will continue to rise from here and we have the spectre of the 2010 budget on the horizon.
Whichever party is in charge by then will have no option but to raise taxes significantly (VAT at 20 per cent?) and make tough public sector cutbacks. That will be bitter tasting medicine, but it's the only realistic course of treatment for our sick economy. None of this gives me confidence that a huge economic turnaround is just around the corner.
But the stock market and the economy are not the same thing. Stock markets can actually perform well even when the economy is doing poorly. Over the next two or three years, investors should be focusing on high-quality companies, so I was especially interested to meet the managers of the Liontrust First Opportunities Fund this week.
The fund launched back in November 2005 and, despite achieving relative success since, is still incredibly small at just £7m. However, this can be a great advantage by enabling the fund managers to be far more nimble and largely relieves them of concerns about liquidity. The fund is run by Anthony Cross, who has been with Liontrust almost from the start, and Julian Fosh who joined around a year ago from a small but successful funds run by Saracen.
The fund has a strong investment philosophy which Liontrust calls 'Economic Advantage'. They look for companies with at least one of three key attributes. First, a higher than average level of profitability, which will tend to translate into a strong share price. Second, intellectual property, which can include things that are hard to replicate and should increase a company's pricing power and the ability to protect its profit margin. Finally,a strong reoccurring income, enabling it to weather poor economic conditions.
The fund has 26 per cent invested in the FTSE 100, around 22 per cent in the Mid 250 index of medium-sized companies, with the rest in smaller companies. It holds a good cross section of defensive stocks and more cyclical stocks. The biggest sector overweights include industrials and technology, while the largest underweights are oil and consumer goods.
Neither manager will say whether we are seeing a genuine economic recovery or merely a rebuilding of inventories. This means it is unclear if increases in manufacturing and industrial output are due to a real increase in demand, or simply because companies are restocking shelves from an extreme low point.
In reality, this is a best ideas fund, drawing on promising stock ideas from across the full spectrum of the market. Liontrust is going through a period of flux after two key managers left the firm earlier this year, but I believe they are making a determined effort to get the ship back in shape. Providing you can afford to be patient and take a five-year view, the UK market currently looks very interesting and funds such as Liontrust are positioning themselves in the right place.
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/independentReuse content