Leigh Harrison's top share picks for income

The UK economy may scrape 1% growth next year – but no more, according to Threadneedle’s head of equities Leigh Harrison.

Yet despite this cautious outlook, he thinks careful ‘bottom-up’ stock picking of firms (based on a company’s individual characteristics rather than the ‘top-down’ approach which starts with the bigger economic picture) within three key investment themes can see his fund deliver between 7% and 10% growth over each of the next three years.

These themes are: UK companies that can benefit from primarily Asian growth; those which are undervalued mega-cap high yielders; and those that he believes are under-rated, unloved consumer-facing domestic stocks.

Citywire A-rated Harrison, who runs the Threadneedle UK Equity Income fund, is positioned cautiously due to the developed world’s onerous debt levels and the low economic growth environment that will be exacerbated by the onset of Western austerity packages.

He said: ‘We have an economy that has grown through cheap credit. All that borrowing is bringing forward future consumption to today and it has to be paid back in reverse.

‘The developed world has suffered from excessive borrowing, including the US, Ireland and the UK, and in an effort to avoid a crash diet, [the debt] has all been shifted on to government shoulders. They in turn are using their creditworthiness to spread repayments over as long a period as possible.’

BP recycled into Shell and RJ Reynolds

Prior to the BP oil spill disaster, Harrison had held a 7% position in BP but when the crisis hit he had begun recycling some of the position into Shell and tobacco giant RJ Reynolds. He now has just a 1% stake.

‘I had already switched some into Shell on valuation grounds prior to the disaster. I sold more after to reduce the risk and halved the remaining position, recycling it into RJ Reynolds after the [dividend] suspension was announced.’

He thinks £4.20 would be fair value for BP (some 30% higher than at present) but warns it might take time for the stock to get back to that level even if BP successfully caps the well. ‘Sufficient damage has been done to its reputation and it might take two years to come back to that level. Without the yield, we are not sure the stock is sufficiently worth increasing and there may be issues with its funding.’

In terms of the UK, Harrison believes the government is hoping its biggest spending cuts are deferred long enough to allow the economy to have grown sufficiently to be able to deal with them.

Leigh Harrison’s top UK income picks