According to Tom Stevenson, investment director at Fidelity Personal Investing, the most important thing to remember about the UK stock market is that it is not a good reflection of the UK economy.

He says: “Back in the Victorian Age London was a conduit to channel money into global investment opportunities and it is again. It is the marketplace for a globalised world, and that means that the recent run of good news for the British economy is welcome but not really relevant to investors in UK funds.”

Rather, Stevenson says, investors should be cautious when it comes to the UK because the London market is sensitive to liquidity conditions.
He explains: “The knee-jerk reaction to Bank of England governor Mark Carney’s recent warning that interest rates could rise sooner than expected gave a hint of how equities could respond to a rise in the cost of borrowing at the end of this year.”

In the current environment Stevenson tips the Fidelity UK Select fund for investors seeking UK exposure. Manager Aruna Karunathilake seeks to take advantage of periods during which negative investor sentiment makes strong companies available at attractive prices.

Stevenson also likes the Liontrust UK Growth fund. He says: “The managers seek to identify companies which have a competitive edge enabling them to sustain a higher level of profitability for longer than the market expects. Turnover of ideas is very low as this approach inevitably leads to a long-term investment horizon.”

His third pick is the Kames Ethical Equity fund. Audrey Ryan, the manager of this fund, focuses largely on small and medium-sized growth companies to maximise returns but also considers the wider economic backdrop.

Darius McDermott, managing director of Chelsea Financial Services, thinks that the number of investors looking to buy exposure to the UK economic recovery has left FTSE 250 companies looking expensive, while smaller companies are also pricey after a recent good run.

He says: “Perhaps the area that represents the best value is the UK mega-caps, which – possibly due to their exposure to emerging markets – now trade on reasonable valuations.”

McDermott favours the GLG Undervalued Assets fund, the Liontrust Macro UK Growth fund and the Schroeder Recovery fund.

Ben Yearsley, managing director of Charles Stanley, likes the J O Hambro UK Dynamic fund. He explains: “Managed by Alex Savvides, this multi-cap fund has cash generation and dividend paying ability at the core of its proposition, mixing those characteristics with turnaround stories and special situations.”

Gavin Haynes, managing director of Whitechurch Securities, prefers equity income strategies in the UK. For a balanced portfolio his team has defensive funds including the Trojan Income fund and the Woodford Equity Income fund.

Haynes says: “We offset this with racier funds such as the Schroder Income Maximiser and the Miton UK Multi-Cap Income fund.”

Next week Your Money’s group of experts will set their sights across the pond, bringing you their US fund picks.