The outlook for UK equities

The UK equity market has been unloved by investors for much of the past decade. However, several positive factors suggest UK equities could return to favour.

The outlook for UK equities

By the end of January 2022, according to one measure, UK equities were a third cheaper than the global average.1 This is despite the fact that around 80 per cent of the top 100 UK-listed companies generate profits from abroad and aren’t really affected by issues such as Brexit.2

Will this year be the moment the price of UK equities starts to close the gap with other markets?

Positive factors include a background that encourages companies to behave responsibly and lots of businesses with strong management teams. There is also now clarity on the UK’s relationship with the European Union, and the country has lifted COVID-19 restrictions quicker than many other developed markets. In addition, and for the first time in a very long while, the UK could grow faster than other leading economies. 

We believe investors should consider looking at individual companies when they invest rather than the overall index. If you look at the US and global indices, a lot of the returns in recent years have been driven by a handful of names; the UK has global leaders in every sector, but for a variety of reasons they have been ignored.

Activists and private equity investors are taking a strong interest in UK equities

The fact that activists – shareholders who try and bring about change in a company in which they invest - and private equity investors are taking a strong interest in UK equities is also a sign the UK is an attractive place to invest.

There are pros and cons to the behaviour of activists. Their presence can force management to be clear around their strategy and vision for a business. On the flip side, it means company management must focus on issues activists raise, ignoring other potential challenges and opportunities in the process.

Where are the best opportunities right now?

Looking at the consumer sector, there is potential for consumers to divert spending from retailing to leisure as restrictions designed to curb COVID-19 infections ease. Rising inflation is also a factor. Higher wages generated by inflation should feed through into sectors like recruitment, but also consumer confidence. That could be beneficial for companies across the supply chain in construction as people are more willing to invest in their homes, highlighting confidence in the economic rebound.

The average investor is still looking for good advice or the right platform to help them build a long-term savings plan

Meanwhile, the higher interest rates implemented to try and control inflation should not hit UK businesses too badly as they are generally in a healthy financial position.

There are also opportunities in areas like financial services, including investment platforms and certain fund managers. The average investor is still looking for good advice or the right platform to help them build a long-term savings plan, and those businesses should continue to grow.

Defence and areas like cyber security are also interesting given the geopolitical situation – that is partly why we have seen a lot of bids for companies in the sector.

Green concerns

The increased focus on environmental, social and governance (ESG) ESG issues is having an impact, causing the price of some companies – who are highly regarded in ESG terms – to rise in the past 18 months.

Traditional energy names have only very recently started talking about investing in hydrogen, biofuels and windfarms

Traditional energy names have only very recently started talking about investing in hydrogen, biofuels and windfarms. There are leaders and laggards in the transition; the latter are changing because they’ve got no choice, but they are not running as quickly as they could be.

Simply investing in apparently environmentally-friendly businesses for the sake of it is also risky. For example, there is a lot of money going into areas like battery technology and electric vehicles, but investors need to be certain about the companies they are investing in.

Three points to remember

  • UK equities are relatively cheap in comparison to other markets, but this could change given clarity on the UK’s relationship with the EU and a positive economic outlook
  • The UK has global leaders in every sector, but for a variety of reasons they have been overlooked by investors
  • UK businesses are generally in a healthy financial position and should not be too adversely affected by rising interest rates or inflation

References

  1. MSCI, January 2022
  2. Bloomberg, September 2021

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