Standard Life’s Cumming Is Bullish on U.K. Equities After ‘Brutal’ 2011
David Cumming, Standard Life Plc (SL/)’s head of U.K. equities, is bullish on British stocks and a global economic recovery this year even after a “pretty brutal” 2011 during which some of his top picks declined by 60 percent.
Cumming, 50, who is based in Edinburgh, said the FTSE 100 Index (UKX) of U.K. companies is priced for “increasingly negative” developments in the global economy at a time when the U.S. and Asia are growing. He’s picking stocks correlated to growth such as Barclays Plc (BARC), GKN Plc (GKN), BP Plc (BP/), EasyJet Plc (EZJ) and Lupus Capital Plc (LUP) to outperform the market this year.
“Given that valuations are very low, equities look cheap against any defensive asset class such as bonds or gold,” Cumming said in a telephone interview yesterday. “The U.K. equity market has quite a lot of exposure to Asia and the U.S. and a high emerging market and resource bias. In a low growth environment, I can see earnings growing in 2012.”
Standard Life, which manages 150 billion pounds ($232 billion) of assets and is the U.K.’s fourth-largest pension fund manager, last year predicted the FTSE 100 to reach 6,900 points based on a strong global economic rebound. The measure closed at 5,572 points on Dec. 30, having fallen 5.6 percent over the 12- month period as the European debt crisis prompted investors to sell off riskier assets such as equities. The U.K.’s benchmark index will finish above 6,000 points this year, Cumming said.
“We underestimated the fact that politicians can muck things up,” he said. “It was very binary. Defensives went up and cyclicals went down, it was as simple as that. The market didn’t differentiate very much. It was pretty brutal.”
Stock Picks Lag
Cumming, who joined Standard Life in 1998, correctly estimated the FTSE 100’s 13 percent rise in the second half of 2010 and last year picked homebuilder Galliford Try Plc (GFRD) as one of his favored stocks before it rose 59 percent in the following 12 months. His other picks didn’t fare so well in 2011 as Vedanta Resources Plc (VED) and Dixons Retail Plc (DXNS) dropped 60 percent while Barclays fell 33 percent.
Aside from overseeing Standard Life’s U.K. equities division, Cumming also runs the firm’s U.K. Equity Recovery Fund (SLIUKII), which has about 30 million pounds of assets. The fund lost 27.7 percent last year, putting it in the bottom 4 percent of its peer group according to data compiled by Bloomberg. The fund, which started investing in March 2009, was up 19.7 percent in 2010, beating 77 percent of its peers.
The FTSE 100 Index’s price to earnings ratio fell in the second half of last year to the lowest level since 2008 and is currently at 10.1, lower than the S&P 500 Index’s (SPX) 13.5 and the STOXX Europe 600 Index’s (SXXP) 11.5. That means investors are betting the U.K. will be hurt by a global recession, Cumming said.
Still Likes Barclays
“The market has built in a more negative outcome in terms of valuations,” he said. “If you take the view the U.S. economy will continue to grow and Asian growth remains robust, if Europe’s flat and the U.K. is growing marginally you’re not going to get a global recession.”
Barclays, the U.K.’s second-biggest bank by assets, is still one of Cumming’s favored stocks this year. The lender is priced at about half the value of its assets, according to data compiled by Bloomberg.
“As continental European banks retreat, they’re taking market share,” Cumming said. “It could easily go up 50 percent if things stabilize.”
BP is also a long-term holding for the manager’s U.K. Equity Recovery Fund as the oil producer’s valuation is still being weighed down by the Deepwater Horizon explosion and the subsequent oil leak in the Gulf of Mexico last year. The firm may increase its dividend and buy back stock, Cumming said.
GKN, Lupus Capital
GKN, a maker of aircraft and automotive components, and Lupus Capital, which makes products for the home construction industry, will benefit from economic growth in the U.S., Cumming said. Applications for U.S. jobless benefits decreased by 15,000 to 372,000 in the last week of 2011, beating economists’ forecasts.
With Italian 10-year government bonds yielding above the 7 percent yield that locked Ireland and Portugal out of the debt markets, the European debt crisis is still the top concern for many investors, Cumming said. He said the monetary union will survive as the region’s debt to gross domestic product, taken as a whole, is manageable at about 90 percent.
“We think the euro will survive,” he said. “The banks are funded now and there’s enough liquidity going in from the ECB to support yields at current levels. We’re not wildly more bullish about Europe but we don’t think it’s going to fall apart.”
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