As signs start to point towards a recovery in the UK economy, investor attention has turned back to domestic companies.

Indeed, the most popular sectors among investors for the first seven months this year have been mainly UK sectors with banks (46%), resources (31%) and telecoms (8.6%) seeing the most inflows, according to statistics from investment platform TD Direct Investing. 

We ask a group of fund managers which sectors look set to perform well as the state of the economy improves…

House builders and support services

Jonathan Ingram and John Baker, co-portfolio managers of the JP Morgan UK Dynamic fund, see value in companies that are positioned to reap the profits from a booming housing sector, especially UK house builders.

Supportive government policies such as the Chancellor’s mortgage guarantee and shared equity schemes have helped to bolster the growth of this sector. There is also plenty of room left for growth, in that the total volume of housing transactions is still less than 50% of its pre-crisis peak. The managers like names such as Berkeley, Barratts, Taylor Wimpey.

There was a general consensus among the fund managers that Ashtead, one of the largest equipment rental groups in the world, will do well thanks to a rejuvenation of the country’s construction business. The company rents equipment to builders and has a flexible cost model.

Challenger banks

Stephen Bailey, co-manager of the Liontrust Macro Equity Income fund, likes the newcomers on the block in the banking sector.

He says: “In our view, the terms of the mortgage guarantee scheme could open up significant opportunities for so-called “challenger” banks to carve out rapidly growing niches within the retail mortgage market at the expense of larger incumbents.

“One of the crucial elements of the scheme is that remortgaging must be through a new lender – lenders will not be able to use the scheme to remortgage their existing loans. To us, this appears to open up a golden opportunity for challenger banks to poach mortgage loans from incumbent banks.”

Industrials

Gary Reynolds of Courtiers Wealth Management thinks that investors should choose their UK sectors on the basis of which ones will benefit most from an improving US economy and a global slowdown in demand for commodities.

He says: “The US car fleet has got older as Americans have held on to their vehicles for longer. There is pent-up demand for cars and trucks and also good growth in the energy sector. So UK industrials supplying to the US, or directly or indirectly involved in the US motor industry and/or US energy sector could thrive and this can have a knock on affect to other companies, like a “multiplier” affect. So we like UK industrials like Bodycote.”

Economic recovery aside, some sectors are set to grow thanks to other supporting factors…

Media

David Lis, head of equities at Aviva Investors, thinks media companies will perform well: “Overall, valuations appear attractive, given that we believe many media companies have more robust cash-flows than the market perceives.

“Reed, Daily Mail and General Trust and United Business Media all have strong market positions and exposure to more resilient business-to-business expenditure. We are also positive on ITV where we see the business model becoming increasingly attractive thanks, in particular, to the increased focus on quality content.”

Pharmaceuticals

Tom Ewing, portfolio manager of the Fidelity MoneyBuilder Growth fund, thinks investors should look at healthcare as a theme. He says: “Healthcare is one of the most attractive themes in the fund thanks to compelling valuations, strong business models and a general lack of belief in the potential of new drug pipelines.

“GlaxoSmithKline (GSK) is a mispriced industry winner that has come through its patent cliff with excellent franchises in the consumer segment and emerging markets. The company benefits from a strong pipeline, particularly in its respiratory franchise with its much-anticipated drug therapy Anora. The outlook for GSK is positive and it could be ripe for a rerating.”

Ewing also likes Shire as an interesting play on new drug therapies with its attention deficit hyperactivity disorder (ADHD) product called Vyvanse.

Technology change

Chris St John, manager of the AXA Framlington UK Mid Cap fund, says the way we have integrated the internet into everyday life is an important investment theme.

He highlights Rightmove, the property search website, as a company that has profited from the growing use of, or even reliance on, the internet.

He says: “Rightmove has established a fantastic market position and developed a dominant market share. House buyer and seller preference means that estate agents now risk losing business if they do not use the site, giving Rightmove great pricing power. The business has strong cash flows and a low level of capital expenditure required for expansion.”

Gaming

Leigh Himsworth, head of UK equities at City Financial, likes the gaming industry. He says: “Generally companies have strong balance sheets – they have been through their recession in October 2006 when the US outlawed online gaming – and they have to cope with on-going regulation and generally negative sentiment.

“The internet provides them with an massive market that continues to grow both in product set (i.e. the types of things one can bet on) and the ability to game through different channels – a betting shop, a PC, smartphone, 3G, 4g etc.”

Companies he tips to do well are Sportech, Ladbroke and Optimal Payments.