Is it time to invest in the UK market again?

25th April 2013


From butter to investment funds, no-one’s buying British any more. The UK has consistently been the worst-selling of all the major regions and flows continue to be anaemic. But just as people have campaigned for food shoppers to buy British, are there also attractions for investors to buy UK shares? Financial journalist Cherry Reynard asks the experts.

The waning popularity of the UK for investors has a number of factors: Partly it has come from a vogue for a ‘global’ approach rather than allocating to individual domestic stockmarkets, but it also reflects the relatively few attractions of the UK from an economic point of view. Wildly indebted, with just about zero growth as the Telegraph reports, there is nothing that would necessarily draw investors to the UK markets.

That said, the stock market has performed relatively well. Over the past 12 months, the FTSE All Share is up almost 14% with even the more defensive FTSE 100 up 12.5%. That is only just behind the US Dow Jones and S&P 500 indices, up 14% and 15.5% respectively and well ahead of the Hang Seng, which is up just 7.3% over the same period. The average fund in the UK Equity Income sector is up almost 20% this year.

Can this continue? The standard line is that the UK market is geographically diversified, deriving earnings from around the world and this is why the stock market has managed to transcend the weakness of the UK economy. However, it has not necessarily been a disadvantage to be exposed to the domestic economy. For example, economically sensitive areas such as house builders and retailers performed well in 2012.

Valuations in the UK market have been undemanding and expectations low. Ashton Bradbury, head of equities at Old Mutual, says at 12x earnings with a 3.5% yield, the UK market is relatively good value. He believes that even in a climate of zero growth, the UK stock market can still make progress.

Paul Mumford, manager of the Cavendish UK Opportunities fund, agrees, saying the market seems excessively cheap: “Although there are problems such as China or Europe looming, the market is still below its 1999 peak. The All Share is currently on 14x earnings, having been as high as 30x with an average of 16x. Equally, the fundamentals are quite good. It is coming into a new financial year, with people putting money into Sipps and Isas. Pension funds that have been in bonds are moving into equities.” He believes that the conditions are in place for a decent bull run in UK equities.

Mumford is also finding corporate confidence increasing. He says that companies are increasing willing to undertake M&A activity and invest to grow.

Even where industries are having problems, Richard Watt, manager of the Old Mutual UK Select Mid-cap fund, says that some companies are benefiting from the weakness of their peers and consolidation in their sectors. He gives the example of Greene King, which is building market share as smaller pubs struggle. Equally, in the budget airline industry many of the weaker carriers are walking away, helping groups such as Easyjet build their franchise. There are companies that are benefiting from the economic weakness.

That said, some even go as far as to suggest that the UK economy may be stronger than people think. Richard Jeffries, chief investment officer at Cazenove Capital, says: “Mark Carney’s comments that the UK is one of a number of ‘crisis economies’ made for some extravagant newspaper headlines. Fortunately, the truth is somewhat different. While the UK is still facing a number of problems, it is far from being in crisis….The bottom line, according to the ONS, is that the economy grew by 0.3% in 2012. That has already been revised up from a preliminary estimate of 0% growth and I believe it will probably move up further as better information comes through.”

Bill McQuaker, head of Multi-asset at Henderson Global Investors, is buying a little more British across his portfolios, saying that the UK is enacting a lower-key version of the reforms in Japan. For example, changes to the Bank of England’s mandate are creating a climate in which inflation may be tolerated in exchange for higher growth. He adds: “The initiatives in the budget to support the housing market are also encouraging. The housing market is a powerful driver of growth. Equally, the currency has weakened, which should be useful for exports, but also has an important impact on the stock market as many UK companies generate earnings in US dollars.”

Although opinion varies widely about where the likely strength in the UK market will be in future, a recurring theme is dividends. If the ‘great rotation’ finally materialises, money moving out of bonds is likely to be looking for a yield from equity holdings. Rob Burdett, joint head of multi-manager at Thames River Capital, suggests seeking out niche UK equity income funds as he told trade website Fundweb.

So the answer could be to buy British. There could be money to be made. And – like buying British butter – you’d be supporting a good cause.

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