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Should you be investing in UK equities now?

Written by: Adam Lewis
With the FTSE 100 this week passing the 7,000 barrier for the first time since March 2015 and the International Monetary Fund (IMF) forecasting the UK will be the fastest growing G7 economy in 2016, it might seem a tempting time to invest in UK equities.

However, before getting too excited it is worth asking a few questions such as what’s been behind the recent surge in the stockmarket and does it have further to go?

With this in mind spoke to Chelsea Financial Services managing director, Darius McDermott, about the factors behind the rally and what investors should be bearing in mind when it comes to investing.

“Much of the rise in the FTSE is down to the weakening of the pound, rather than fundamental strength in the underlying companies and that makes me uneasy,” says McDermott.

“We feel the UK market is high given that all the pain of Brexit is still to come. That said, sterling could continue to fall as we get closer to invoking Article 50, so the stock market may continue to rise for now.”

Given the rise in the FTSE 100, McDermott adds that quality companies are now on the expensive side, meaning their share price has already gone up a lot. However, he adds this has been the case for a while and for the time being investors seem to be happy to pay up for them.

“Some of this may well be to do with the fact that bond yields are so low, investors are willing to pay more for the income producing companies of the FTSE,” he adds.

Some areas of the UK market however remain unloved by investors, namely oil and mining stocks. While these sectors have also rallied, McDermott says they still look reasonable value.

“Banks are completely out of favour too,” he adds. “There could be money to be made in these areas of the market but it won’t necessarily be made soon. It may take a rise in interest rates to be the catalyst for this to happen. Then we may well see funds of a ‘value’ strategy start to outperform those with a ‘growth’ strategy.”

If you believe this to be the case, he says you could consider a fund like R&M UK Equity Long Term Recovery or Schroder Recovery, both of which McDermott rates very highly.

So what of the recent IMF forecast of the UK being the strongest performing G7 economy in 2016? Firstly, it is important to note that while economic strength is both good for market sentiment, economies and their underlying stock markets are two very different animals, with one not being directly correlated to the other.

“I think the important thing to remember here is that while we might be the strongest economy in the G7, there isn’t much competition and it’s actually a low bar,” notes McDermott.

Indeed, despite the headline grabbing element of the UK being the strongest economy, underlying this the IMF did slash its forecast for UK GDP growth in 2017 to 1.1%, down from the 1.8% it expects this year.

“Who knows what the next six months could bring?” says McDermott. “There’s the US election, Italian Referendum and possibly a hard Brexit ahead. I’d take any talk of a strong economy with a bit of a ‘pinch of salt’ and the future is so uncertain.

“The good news is that while the UK stock market may be very volatile over this period, volatility creates opportunity and a good active fund manager could well pick up some bargains that reward investors over the longer term.”

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