The election result has changed the landscape in Westminster and it has also lifted UK market sentiment.
Investing in the UK market
The FTSE All Share index has climbed over 4% and the pound has risen over 3% against the US dollar, all within a week of the Election Day. How will the UK market treat its investors in the coming year?
Latest data indicates that inflation is still well below target, a little sign of underlying price pressures and GDP growth running below trend. This, coupled with a robust labour market, means the Bank of England is more likely to be dovish on the interest rate.
Winning majority seats in parliament paves the way for the government to pass an expansionary budget at the first opportunity, an injection to the economy and sentiment. UK businesses have been withholding investment plans due to uncertainty. Brexit now appears inevitable, at least lifting one aspect of the uncertain fog.
Since June 2016, global investors have pulled over £18bn from UK equity funds, resulting in an attractive valuation for the UK stock market as a whole compared to other developed markets. We could see the capital flow back to the market once the confidence is restored.
All the while, the forward P/E on the All Share index is around 14 times earnings, well below the long-run average, and rates are still likely to remain below historical norms for some time to come.
Economic data is still weak. Fiscal stimulation could take time to feed through.
The initial hype from the election result could cool down when rationale kicks in. The future trading relationship with the EU and the rest of world is yet to be negotiated. A clear majority in parliament could also raise the odds of a no deal Brexit next December.
What UK funds and ETFs to invest in?
Although the cloud of uncertainty on the horizon is yet to be cleared off, the UK equity market is appealing to the bargain hunters and its outlook appears to be upbeat. The following funds have growth bias, have been managed with disciplines and have the potential to capture the opportunities presented in the current UK market conditions.
Unicorn UK Income Fund aims to achieve a historic yield in excess of 110% of the FTSE All Share yield over a 3 year period, by investing mainly in UK companies. The managers identify undervalued, profitable, strongly managed growth companies that are underappreciated by the wider market, with bias towards mid and small caps. This fund will be appealing to the investors who seek income and capital appreciation.
CFP SDL UK Buffettology seeks to deliver a return superior to the performance of the UK stock markets over 5 to 10 years by investing in good quality businesses at attractive valuations. It has multi-cap concentrated composition which derives revenue stream from worldwide sources.
Chelverton UK Equity Growth is a mid and small- cap focused fund, aiming to achieve long-term capital growth by investing in companies that can grow quicker than the market, demonstrate sustainable competitive advantages, strong cash conversion to fund organic growth. It invests solely in UK listed companies that are outside of the top 100 by market capitalisation down to a minimum market cap of £25m. The technology sector has a weight over 28%. This fund may appeal to the investors who have high risk appetite in the UK market and seek exposure outside of the FTSE 100. It can also be incorporated into investors’ overall portfolio as a satellite position.
iShares UK Small Cap ETF seeks to track the performance of an index composed of small cap companies in UK. The fund has around 250 holdings, thus giving a broad exposure to companies, especially domestically focused ones, in the UK. The leading sector exposures are Consumer Discretionary, Industrials, Financials and Information Technology. The fund does not pay out dividends, income is instead reinvested, and thus is more suitable for the growth focussed investor taking a diversified approach.
SPDR S&P UK Div Aristocrat ETF tracks S&P UK High Yield Dividend Aristocrats Index measures the performance of the 40 highest dividend yielding UK companies included in the S&P Europe BMI. The distribution yield is just under 5% which is paid out semi-annually and the fund has a relatively low total expense ratio of just 0.3%. This fund is suitable for medium risk investors looking to take a measured approach to equity income investing.
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