The recent market volatility is throwing up some interesting opportunities. We base our investment decisions on whether valuations look attractive, whether margins are sustainable, and whether strong cash generation can continue.

On a P/E basis the FTSE 350 is roughly in-line with its historic average, making it look neither particularly cheap nor particularly expensive, however the underlying quality of companies has improved.

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Since the downturn, corporates have remained incredibly focused on running lean organisations and have taken a cautious approach to capital expenditure and M&A decisions. This has left many companies in a net cash (or near net cash) balance sheet position with high operating margins.

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Taking chain manufacturer Renold as an example, management have done an excellent job improving operating margins to a high-single digit level, and earlier on this year they announced medium-term plans to achieve a mid-teen level for margins.

This is not a one-off case – there is still good scope for margin growth in many specialist industrial companies in the UK such as Scapa Group and Avon Rubber.

Aside from specialist industrial companies, an area we have found ourselves looking at this year is companies undergoing recovery such as Balfour Beatty and Tesco. Both have had a new management team come in with the aim of returning the company to near historic operating margins.

In both cases we think the measures the new management teams are taking are sensible – in Tesco's case reducing the range of goods on offer (but making those left more competitively priced), while putting more staff back into stores.

One area we are less constructive on is UK housebuilders. The shares have performed extremely well in recent years and are now trading significantly above book value.

The UK is not currently building enough houses, and over time if we are to reach the building rate required this is likely to put pressure on the current high margins of housebuilders as they have to buy more land and hire more workers.

Laura Foll is deputy fund manager of Lowland Investment Company  

Bull Points

• Company balance sheets and cash generation are strong

• Dividend growth is high among smaller- and medium-sized companies

Bear Points

• Some larger company dividends look unsustainable, for example, those exposed to commodities

• Tentative signs of a growth slowdown in the US