The UK economy could be the underdog that investors can cheer for.
Investing in the UK
Cheering on the underdog is as typically British as eating fish & chips or putting on the kettle in a crisis. I believe that at this point in time, the UK economy could be the underdog that investors could cheer for and why now may be a good time to increase exposure to the great land.
Data from trade bodies and analysis from our customers’ trading activity suggests that UK investors have been diversifying their portfolios away from UK for some time. This is cemented by data from the Investment Association (IA), the trade body that represents UK investment managers, which highlights how the UK All Companies sectors have appeared as the worst selling sector by net sales an impressive seven times in the last 10 years. Indeed, the IA data shows that investors have pulled £5.5bn from UK equity funds since June 2016.
It wouldn’t take a genius to recognise that increasing questions over Brexit, UK politics in general as well as the country’s position on the world stage has resulted in increased pessimism and ultimately the UK becoming the most unloved developed market to invest in. However, sentiment towards the UK has got so bad that I would suggest there could be a case to say that now might be a good entry point for contrarian and value investors to start increasing their stake back in UK equities.
Investing in the UK means you can still go travelling
Investing in UK still provides investors with significant exposure to overseas opportunities. The FTSE 100 for example generates around 75% of its revenues from overseas operations. In addition, current valuations make the UK a ripe hunting ground for overseas predators. Elsewhere, over the longer-term, the mid-cap FTSE 250 index tends to provide better growth opportunities with approximately 50% of the revenues from the companies in the index generated from overseas activities.
Glass half full
There is certainly no denying that headwinds remain; wage growth is below the rate of inflation and has been since the end of 2016. However, there is a hint of optimism in the air. It is assumed by economists as well as the Bank of England that inflation will fall nearer the 2% target by the year end as the transitory effects of a weaker Sterling and a higher oil price fade. This should result in wage growth higher than inflation once again. The effect of this should provide a boost to the UK consumer and their ability to spend has a significant impact on the health of the economy and its ability to grow.
Yes, Brexit is likely to be a drag on investor confidence in the interim but the economic situation has been better and more resilient than many expected indicating that the wheels haven’t come off. Indeed, in the 2018 spring statement the chancellor raised the UK growth forecast to 1.5% up from 1.4%, borrowing expectations were revised down and a small current surplus is expected in 2018 to 19; a surplus which should leave some room to borrow to fund capital investment rather than meet day to day spending needs. All the while, the forward P/E on the All Share index is around 13 to 14 times earnings, well below the long-run average and rates are still likely to remain below historical norms for some time to come.
Bark is worse than its bite
While the underdog, in this case the UK economy is not likely to grow as fast as other economies in the near future, investors should appreciate that it is still expected to grow and be pulled up by the rest of the world. Unlike some other economies equity markets UK valuations look a lot less toppy at this stage in the cycle. Given the competing factors as laid out above at this point in time active management should outweigh a passive approach.
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