The economy might be on the mend, but there are likely to be a few bumps along the way, warns Threadneedle.

Cormac Weldon, head of US equities at Threadneedle, predicts that there will be some consolidation in the market, and a return of more discrimination on the part of investors when they seek stocks in which to invest.

He says, ‘The knowledge that difficult business conditions are likely to persist for some time could see a return to favour of growth stocks, i.e. those companies that have strong competitive advantages which enable them to generate earnings even in challenging economic circumstances.

According to Weldon, these were stocks that tended to fare best at the beginning of the year and at the tail end of 2008, when market conditions were particularly bad.

He cites Kroger, the supermarket company, as a good example, as its low cost of distribution enables it to gain share against its competition. In general, defensive stocks underperformed the market so markedly in the spring rally that they are likely to benefit from any return of investor caution.  

He adds, ‘There are a number of industries that we believe have the potential to do relatively well in the persistently challenging conditions we foresee ahead. Having survived the difficult conditions following the bursting of the dot-com bubble at the beginning of the decade, information technology (IT) firms are among the leanest and best managed of companies. Most importantly, their managements know better than those of most other companies how to adapt and pull through in a very tough environment.

‘This is why we see them as some of the most likely to come out of the current downturn in a strong position when the good times return. In particular, a number of software companies offer predictable revenues and profits and the ability to grow in the current environment, for example Oracle. In addition, Apple continues to grow, supported by its creativity in designing products such as the iPod and iPhone.’

Weldon concludes, ‘Although investors may become more cautious in the months ahead, we judge that the recent rallies we have seen in oil and other commodity-linked stocks probably have further to run, as markets increasingly focus on the constrained supply and the potential for increased demand when the economic recovery begins to gather steam. However, perhaps one of the biggest themes we expect going forward will be a greater focus by investors on individual companies, rather than on sectors.’