Santander UK Equity Income Fund has published its forecast for 2008 and revealed that it favour larger companies, especially the mega caps, as they continue to look attractive.

This appeal is driven by stable earnings prospects, strong balance sheets and growing dividends at attractive initial yields.

Hak Salih, manager of the fund, said: “Given the weaker outlook for the UK economy combined with interest rate cuts it is likely that we will see a period of Sterling weakness both against the Dollar and the Euro.

“Considering the large exposure to overseas earnings of the FTSE constituents, this is another reason for the preference for larger caps in the UK. Mid and small caps in general remain unattractive due to their larger domestic and consumer exposure. However, as always in a market shakeout with indiscriminate selling there will be attractively priced opportunities for us to increase our exposure to these areas as the year pans out.”

Santander says that the softer outlook for global growth means it has significantly reduced its exposure to the mining sector compared to last summer’s overweight position against the income sector. The significant re-rating of the sector has left most valuations unattractive given the softening outlook for global commodities demand. However, significant corporate activity is the last story to play out in this sector and its remaining exposure plays to this theme.

Salih added: “Although prospects for the equity market in the next 12 months look unexciting we believe that we are unlikely to see the significant underperformance of the income sector that we saw last year. Instead, with falling interest rates and a positive outlook for higher yielding larger caps, we believe the income sector should be well placed for 2008.”