Investing in the UK’s recovery

This summer, the UK is poised for its fastest period of economic growth since the Second World War. As Britain emerges from lockdown it is anticipated consumers will start to spend the money they have saved over the past 12 months or so and economic activity will rebound sharply.

But although hugging is back and six people or two households can mix indoors, investors have so far failed to embrace the opportunities in UK equities, instead withdrawing £1 billion from UK large-cap and equity income funds last month alone*. The asset class remains very much out in the cold.

Darius McDermott, managing director at Chelsea Financial Services, commented: “UK equities are definitely cheap relative to other asset classes and geographies. The Brexit cloud is now gone, we’re well ahead in the race for vaccinations, UK GDP is already shooting up and inflation is high, so I’m surprised investors are not more positive about UK equities.”

But the question on investors’ minds is, what will people actually do? As Julian Chillingworth, chief investment officer at Rathbones, pointed out in a recent update, “It takes more than desire to make a transaction. Firstly, many people have had a tough time during the pandemic, either being made unemployed or being furloughed. They may want to jet off on a sun-drenched holiday, go out to restaurants, pubs and theatres, but they may not have the cash to do so.”

Others are more optimistic. ES R&M UK Recovery manager Hugh Sergeant, said: “The UK domestic economy looks very well set for at least the next 24 months; this is almost consensus now but is not at all reflected in the valuations of domestic recovery stocks. I am starting to think that the biggest risk to our portfolio is taking profits in the reflation and value trade too early. The reason I say that is that if this is really it (a paradigm shift, from deflation to reflation) then we are just in the foothills, and do I, a value manager (with ten years of pain under my belt) want to jump-off right at the beginning of a more positive cycle? No, I do not!”

And it’s not just UK equities that could do well. In his recent quarterly update, Artemis Corporate Bond manager Stephen Snowden said the fund benefited from its overweight exposure in COVID-19 impacted sectors such as pubs and restaurants, which outperformed on the back of positive news around the economy re-opening.

“We took advantage of new issues over the quarter to increase exposure to those sectors, buying Whitbread and adding to Greene King,” he said. “We think that these sectors will benefit from pent-up demand and increased domestic consumption. Generally, we have paid for these additions by selling bonds that were beneficiaries of the lockdown and where valuations offered little upside like GlaxoSmithKline and Tesco.”

Six different ways to invest in the UK

For those wanting to back the Great British Bounce, here are six different ways you could invest:

1. Multi-cap UK equities

For those wanting to invest across the UK stock market, a fund that invests in companies of all shapes and sizes could fit the bill. Liontrust Special Situations on the Chelsea Core Selection or Ninety One UK Alpha, are such examples.

2. Small cap UK equities

If you have a slightly higher risk tolerance, the UK’s smallest companies are another option – this asset class has historically performed well in recovery phases. TB Amati UK Smaller Companies on the Chelsea Selection is worth a look, as is Unicorn UK Smaller Companies.

3. Sustainable UK equities

The manager of Edentree Responsible and Sustainable UK Equity fund believes the UK has a unique opportunity to take a global leadership position as a market for ESG investors, driven by several sustained industry trends and a more supportive macro-economic picture as we move through 2021. ASI UK Ethical Equity is another option.

4. Long/short UK equities

While all the signs currently are for a strong economic recovery, further lockdowns are of course a possibility and a threat - as is higher inflation. As a result, the stock market could face volatility over the summer. Sanlam Enterprise and Threadneedle UK Extended Alpha both aim to make money from rising and falling share prices.

5. UK equity income

UK dividends took a hammering last year. Slowly but surely, however, companies that had to cut or cancel their payments are beginning to reinstate them. A fund with a value style to consider here is Threadneedle UK Equity Income. GAM UK Equity Income is another option.

6. Sterling corporate bonds

And finally, for those wanting a lower-risk approach, investing in the bonds of UK companies could be another way of participating in the economic recovery. Inflation is, of course, a danger for bond investors, but there are areas which perform better than others in this environment: financials being one of them. GAM Star Credit Opportunities specialises in this area, as does TwentyFour Corporate Bond.

*Source: Morningstar, FT Adviser, 19 May 2021

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.

Published on 20/05/2021