BLOG: Football’s not coming home – but investors should!
“It’s the hope that kills you” is a phrase often used in English football, referring to the thought that fans may be best not raising their expectations if their team fails. It really was hard not to on this occasion – making England’s exit at the hands of Italy all the more crushing.
But there are positives – all roads now lead to the 2022 World Cup in Qatar in just under 18 months and, with a young, talented squad, there are plenty of reasons to think England can go one step further.
While fans of the national team have 18 months to wait, those looking to invest in their home market (and yes, I know that also includes Scotland, Wales and Northern Ireland!) might have reason to think now is the opportunity for UK equities.
The UK has been unloved for the past five years, following the Brexit vote in 2016. Uncertainty is a dirty word in investing – and foreign investors have steered clear whilst the prolonged divorce from the EU took place. Figures from the Investment Association show there were more than £16bn of net retail outflows from UK funds between January 2016 and December 2020.
However, the positive news around a Brexit deal with the EU and the UK’s vaccine efficacy have clearly boosted the market. Sentiment is also on the up – the recent Bank of America global fund manager survey shows respondents are “overweight” UK stocks for the first time since March 2014.
Below are five reasons to believe now is the time to back UK equities (and a few funds to choose from as well):
- Economic rebound
The double whammy of a Brexit deal and the UK’s aggressive vaccine rollout at the end of 2020 may well be viewed as an inflection point for UK equities. The housing market has been robust, with prices up 10 per cent in March 2021 versus the same time last year—the fastest rate of growth in 14 years. The pandemic has also created forced savings when the economy was shut down, leaving a lot of pent-up demand among investors – this could benefit cyclical sectors, like leisure or construction, once the economy is in full swing.
- UK stocks are still undervalued
Stock markets are usually the first to spot a trend, but it seems sentiment is a hard thing to shift. Despite the positive news mentioned above, UK equities are still trading at a 40 per cent discount to their peers, a 30-year low. That’s a great entry point for any investor with a long-term investment horizon.
TB Wise Multi-Asset Growth manager Vincent Ropers says despite the good news surrounding the Pfizer vaccine in Q4 last year, the global investor base is still looking to rotate their portfolios away from the winners of yesteryear and will continue to look at UK equities favourably.
- Inflation rising – but still transitory
A strongly rebounding economy, combined with a fiscally loose environment and some supply-chain challenges due to Covid, have also given rise to inflation concerns. We’d argue that while it has been stickier than many believed it would be in the UK, inflation will remain transitory and that price increases from inflation would have to feed into above-average wage increases in order to generate a sustained inflationary spiral. That is not happening at this stage, while the Bank of England does not appear to be changing its accommodative monetary policy to meet the challenge of inflation.
- M&A activity
One area which has picked up is M&A activity with UK companies in demand from private equity firms and peers at home and overseas. We’ve already seen some £25bn worth of UK-listed companies being taken private in the first five months of 2021, more than what was seen throughout 2020 and dwarfing the 2018 and 2019 figures. This is major boon for UK plc, with opportunities for fund managers to make big gains if a company they own is acquired.
- The value rally
The rapid rebound in value investing (picking stocks that appear to be trading for less than their real value) is also good news for the UK, which has an overweight to cyclical industries which fall under this investment style. A prolonged recovery (for the first time in more than a decade) can only benefit UK equities.
The recent positive newsflow and the continued discounted rate UK equities are operating at are a compelling argument. I’m not saying there will not be more bumps in the road – but the upside potential looks extremely attractive at this stage. Investors may want to consider the likes of ES R&M UK Recovery or Schroder Income, both of which are value-focused. Those preferring small caps may also want to consider the TM Tellworth UK Smaller Companies or Unicorn UK Smaller Companies funds.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre