The end of QE signals economic recovery, says BlackRock’s Plackett

With the end of QE in sight, things are starting to look up, according to Richard Plackett, co-manager of the BlackRock UK Special Situations Fund.

Equities remain attractively valued
With UK interest rates at an all-time low, and cash not yielding much for savers, equity investors are seeing the benefits of investing. There are higher growth rates in certain parts of the world, signalling signs of recovery, and with over 75% of the earnings of the UK equity market being derived from overseas, the UK small & mid cap sector has successfully positioned itself towards markets and industries that demonstrate higher growth prospects.

Signs of stabilisation and roots for positive recovery are also being seen in Europe, with Europe Markit Services PMI: 51.3 in August 2013, up from 46.2 in August 2012.Looking to seize these value opportunities and investing in companies that have high exposure to these regions and sectors, such as our holding in a company called SIG, an insulation and energy management company operating in the UK and mainland Europe, that has high exposure to European growth.

Growth is much more balanced than it used to be
Emerging markets are in a process of deceleration, although still growing faster than developed markets, where growth is largely in specific sectors. In the UK this is driven by the consumer and house builders and in the US the construction sector. The UK house building sector has undergone a contraction in lending to unlisted companies and businesses such as Bovis and Bellway take a much greater share of the new build market, while the Help to Buy scheme is stimulating demand.

With growth being driven by the West, investments in emerging markets are being approached cautiously. The GDP figures coming out of China are much more muted than previously, and this will provoke continued volatility in the emerging markets. For this reason, Standard Chartered, a bank which has considerable emerging market exposure, is no longer considered attractive.”

The end of QE signals economic recovery
Although QE tapering will incite market volatility in the short term, it signifies recovery, and demonstrates that the world is in a more stable place. Whilst this trend is mainly beneficial, the UK elections in May 2015 do need to be taken into consideration as they will likely lead to volatility in the market.

Even in a post-QE world the small-cap market may continue to outperform the large cap market. Since the inception of the Numis Smaller Companies Index in 1955, it has outperformed the large cap index 3.8% per annum on average. Companies capable of good earnings growth, with strong management teams, track records and balance sheets are likely to be rewarded with continued market share gain as they reap the rewards by continued investing in difficult times. Two examples in the BlackRock Special Situations Fund are: Aveva, a computer software company, and Rotork, a world leading global manufacturer of electric, pneumatic and hydraulic valve actuators. Both have survived the downturn and have grown significantly and sustainably over the medium term.

With UK small caps growing at a much faster rate than large caps, investing in small caps may continue to provide investors with significant returns.

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