UK Managers remain optimistic ahead of Friday’s GDP numbers

by | Feb 9, 2023

vanguard

Ahead of tomorrow’s official announcement of UK GDP growth for Q4 2022, investment company managers are looking beyond a potential recession and see opportunities in sectors as diverse as banks, technology, construction and retail.

The Bank of England continues to predict a recession in 2023, albeit a shorter and shallower one than it previously suggested1. UK stock markets have been among the world’s best performing recently, with the FTSE All Share Index having generated a total return of 5.81% over the past 12 months and the FTSE 100 having delivered 8.13%2.

The Association of Investment Companies (AIC) has gathered comments from UK investment company managers on prospects for UK equities and where they are seeing the best opportunities.

Jonathan Brown, Co-Manager of Invesco Perpetual UK Smaller Companies, said: “Although economic growth has started to soften and this trend will likely continue this year, it is doing so from a relatively strong starting point. The UK has high levels of employment, and for the most part, consumer, business and importantly banks’ balance sheets are in robust positions.

“There are clearly headwinds but perhaps not quite as bad as some commentators would have you believe. This gives us confidence that cyclical or economically sensitive stocks, which saw something of a rebound in the fourth quarter following a difficult year, can continue to do well and these stocks are currently trading on historically low valuations. We also think that technology stocks and some growth stocks, many of which have sold off significantly, are now starting to look more attractive.”

Alex Wright, Portfolio Manager of Fidelity Special Values, said: “In our opinion, the UK market with its higher dividends offers a better prospective return than many other asset classes, including global equities. Merger and acquisition activity has been unprecedented over the past couple of years, mostly involving private equity players and US-based corporates willing to pay prices based on US valuations.

“In this environment, I favour financials, especially banks whose profits benefit from a rising rate environment. The backdrop is also positive for life insurers, whose earnings have proved resilient during the pandemic and should continue to benefit from an acceleration in the pace of pension fund re-risking. Other businesses such as Serco, the government outsourcer, benefit from a stable demand environment and offer strong contract visibility, a degree of inflation protection in its contracts and a strong balance sheet.

“Conversely, I’m wary of areas such as housebuilders and other finance dependent sectors which are likely to be badly impacted by the increased cost of finance for their customers, even if not highly leveraged themselves.”

Jean Roche, Manager of Schroder UK Mid Cap, said: “Our analysis over the past 32 years shows that, after a period of underperformance of large cap shares, UK mid caps tend to significantly outperform large caps over a three to five year period.

“The top ten holdings in Schroder UK Mid Cap are forecast to grow their sales by 12.6% on average this forecast year and 5% next year. They are in sectors from vehicle distribution to retail, to industrial and electronic engineering, to asset management. Some generate 100% of their sales in the UK and others, 98% ex UK.

“This forecasted growth contrasts with the anaemic or even slightly negative GDP growth forecast for all G7 economies by the IMF for example, over the next two years.”

Simon Gergel, Portfolio Manager of The Merchants Trust, said: “With the UK market modestly priced and very polarised, there are opportunities in a range of sectors to find strong businesses trading on attractive valuations. Many cyclical stocks such as in the housing, construction and retail sectors offer particularly good value on a medium-term view. There is clearly more short-term risk in those industries, so we are focusing on the companies with robust balance sheets and strong market positions. But we also continue to see good value in industries such as energy and banks, despite good performance last year, as these industries have been transformed over recent years. In both these sectors, we are seeing much more disciplined corporate behaviour, improving financial returns and growing dividends and buy-backs.”

Abby Glennie, Manager of abrdn UK Smaller Companies Growth, said: “Market conditions make for challenging times at the moment, with the length and depth of the recession a key macro factor. We continue to focus on quality companies through a cycle, paying particular attention to earnings resilience, visibility and balance sheet strength. We’ve been pleased with the earnings resilience being demonstrated by companies in our portfolio.

“We also believe earnings momentum, demonstrated by increases to earnings expectations, is an important driver of shares. Whilst many of our businesses that showed strength in 2022 earnings continue to demonstrate resilience, we also expect other companies to begin to demonstrate earnings momentum, particularly if a recession is lighter than many expect. As 2023 progresses, we will continue to look for those emerging opportunities as potential new additions or top-ups in the fund.”

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