Could Europe be the next recovery play?
The Bank of England Monetary Policy Committee (MPC) met this week and decided to keep interest rates...
What an exciting few days we’ve had in the Slator household: play dates in the garden, haircuts all round, and a trip to an actual shop to – wait for it – browse… If the number of people in our town centres and in pub gardens are anything to go by, I’m not the only one enjoying our new found freedom.
And if we are all feeling more optimistic about the future, and that pent-up demand is no longer pent-up, should we feel more optimistic about UK equities too?
Having lagged other stock markets in last year’s global recovery due to its underweight in technology stocks and the ongoing Brexit uncertainties, last week, the FTSE 100 rose above the 7,000 mark for the first time since the pandemic hit, and the FTSE 250 also made a new all-time high. So is now the time to invest? Or will the economic rebound be as brief as the British summer could be?
Julian Chillingsworth, chief investment officer at Rathbones, is optimistic: “There’s a lot of money to be spent out there, with UK households amassing about 10% more savings last year than they did before the pandemic. That’s the second-highest proportion of any major nation (the US being the highest),” he said.
“As long as the vaccine rollout continues and variants don’t get too nasty, we should be in for a rejuvenating summer, for businesses and for our wellbeing. In the UK, economic growth returned – albeit modestly – in February. The 0.4% monthly increase leaves GDP 7.8% below its pre-pandemic level, but it’s a start. Driven by construction and manufacturing, it should soon be bolstered by the reopening of the hospitality sector.
“Just take a glance across the Atlantic for an example of what we can hope for: economists have pushed up their expectations for US economic growth in 2021 to in excess of 7%. Some have gone as high as 9%.”
Alex Savvides, manager of JOHCM UK Dynamic agrees there are opportunities in construction and further opening up of sectors. In his latest monthly update he said: “An unscheduled trading update from Crest Nicholson highlighted once again that analysts continue to underestimate the pace of the strategic turnaround and health of the UK housing market.
“Likewise, it is remarkable to report that shares in TT Electronics’ closed up just 8% relative to the benchmark despite the UK regulator for medicines and healthcare products approving the use and sale of iAbra’s rapid COVID-19 screening device, Virolens. Virolens will likely have a pivotal role in opening up mass transit and large venues in a COVID-19 complaint manner. TT Electronics are the sole manufacturer meaning prospective order volumes could be transformational to the company’s earnings profile.”
Jonathan Winton, co-manager of Fidelity Special Values investment trust, also believes that the UK remains attractive in terms of valuations. “Despite the strong gains, the UK market continues to look very attractive compared to the US and Europe, trading on a 40% and 25% discount respectively. It continues to be one of the lowest rated markets globally, despite a relatively favourable economic growth outlook and greater Brexit clarity. Encouragingly, many UK companies are reporting strong trading whether they’re domestically or internationally exposed, and in that context, it’s hard to see why the UK discount should persist.”
For those looking to invest in the UK, there is a plethora of choices. Here are four Elite Rated UK equity funds investing in different ways:
This fund encapsulates the best ideas from the experienced team at Aberdeen Standard, Manager Lesley Duncan and her team regularly survey their investors to determine evolving ethical themes. The result of these surveys influences which sectors or companies are eliminated by their investment screen and means they are picking companies that truly reflect the values of their investors. There is a noticeable mid-cap bias in the fund and this bias will mean it will have increased exposure to the UK’s domestic economy.
The team behind this fund believes that markets are excessively focused on short-term factors and that many analysts concentrate on the next set of results and not where a company will be in five years’ time. This creates opportunities and the majority of the portfolio will be invested in companies with attractive quality characteristics in terms of business model, financial model and management. At least 50% of the fund’s holdings will be in the FTSE 100.
This fund invests primarily in large UK companies, but with an unusual approach. As the name suggests, the manager aims to extend investors’ potential returns by buying stocks he expects to do well and also looking to make money on stocks he expects to do badly (shorting). Valuation is key to the strategy, sitting at heart of process with the team being prepared to take advantage of short-term volatile markets to make long-term gains.
This is a very high conviction UK smaller companies fund composed of around 40 stocks. It is a small, flexible fund with a solid investment process and a highly competent team. It is also a true small cap fund that invests in genuinely smaller companies rather than mid-cap stocks. Another positive is that the fund avoids low quality, cash-burning firms and all companies must be profitable at the point of investment. A large proportion of research is performed in-house. This allows Unicorn to identify companies often missed by brokers.