“The definition of “transitory inflation” continues to be stretched, but we believe the bulk of inflationary pressures seen in the current data is temporary, and that forecasts for inflation as high as 7% for 2022 will prove excessive. Elsewhere, we have been surprised by the increased government intervention in the United Kingdom across the private sector as the pandemic has subsided. We see this as a harbinger of risk should it continue. There is a limit to how much a government can step in to help failing companies and sectors. In our opinion, reducing competitiveness in an economy rarely results in the effective allocation of resources and beneficial outcomes over the longer run.
“Despite these risks, we believe the UK consumer is well-capitalised to abate rising energy prices and interest rates. Through the pandemic, consumers have built up savings which are yet to be deployed. A BoE survey (see below) indicated that the majority of investors plan to continue holding onto their savings in the short term, but we expect to see this money flow back into the economy through the remainder of 2021 and into 2022.
“Another positive indicator is a significant increase in market activity as we move past what is likely the most acute stage of the pandemic. By the end of the third quarter 2021, UK equity markets had seen the highest rate of IPOs since 2014, with a quarter of the year still to go.2 While this is partly due to a backlog of postponed IPOs through 2020, it indicates that risk appetite is returning for both businesses and investors. We have also witnessed an uptick in M&A activity, which is typically a strong signal for equity markets as company valuations are perceived to be cheap and ripe for acquisition.
“Turning our attention to valuations, we believe UK equity valuations are attractive relative to the rest of the world. Over the last few months, the valuation discount for UK equities has widened in terms of the price-to-earnings (P/E) ratio, providing an opportunity for active investors such as ourselves to initiate positions in high quality companies at discounted prices.
“Looking forward, the UK Equity team remains cautiously optimistic that there are strong opportunities for investors in the UK equity space due to cheap relative valuations, and that headline risks are potentially being overplayed by the media.”
