Are you ready for the Roaring Twenties? According to the Bank of England, the UK is facing its fastest period of economic growth since World War II as British consumers – armed with well-stocked bank accounts – rise like phoenixes from the ashes of lockdown.
Andrew Bailey, Governor of the Bank of England, predicts the UK economy will grow by 7.25 percent this year. That’s a huge jump from the bank’s February forecast of five percent, while the unemployment estimate has fallen sharply.
But how should investors react to this abrupt change for the good of the economy as we enter step three of the roadmap out of lockdown?
Shopping frenzy: Andrew Bailey, the Governor of the Bank of England, predicts the UK economy will grow by 7.25 percent this year
“There are very good reasons to be positive about the outlook for UK equities,” said Jason Hollands, director of Tilney asset manager. He says the UK stock market has gone from being an “ugly duckling” in 2020 to one of the world’s top performers this year – up nearly 13 percent.
Hollands points out that the UK economy and the stock market are not closely related. Not all stocks, particularly in the FTSE100 index, are domestically targeted, and only certain companies are likely to benefit from renewed economic strength.
REASONS TO BE OPTIMISTIC … BUT WE ARE STILL AT THE 2019 LEVELS
Before we get too excited about the bank’s positive economic forecast, it is important to put it into context.
While the UK stock market has indeed “recovered”, even the bank’s bullish forecast would not bring the UK economy back to the levels it was in March of last year before the coronavirus. Indeed, this will bring the UK economy back to 2019 levels. Official figures last week showed the economy contracted 1.5 percent in the first three months of the year – but grew 2.1 percent in March when lockdown restrictions started easing.
Laith Khalaf, financial analyst at wealth manager AJ Bell, says the economy is expected to stay below prepandemic levels through the end of the year, but this will not pose a problem for the stock market. “It is more the direction of travel that is important for the markets than the absolute level,” he explains.
However, he says there is still some uncertainty about the level and speed of the UK’s economic recovery.
“A lot depends on the UK consumer,” says Khalaf, pointing out that some households suffered during the pandemic while others are now sitting on huge piles of money. It remains to be seen how much of that money will be spent when people rush to shops, restaurants, and hotels.
“If consumers really take off, the economy could be heading for a big boom,” adds Khalaf. “But if you play it safe, it will weaken the recovery.”
And while those who have accumulated in UK mutual funds and UK stocks over the past six months have already had good results, investment performance is unlikely to be as high going forward.
Myron Johnson, personal finance fighter at Wealth Manager Interactive Investor, says that while UK stock market performance has been “spectacular” since November, it would be “unwise to expect this kind of outstanding return to continue”.
He says 20 percent exposure to the UK is enough for most investors’ portfolios, although he believes the market still has legs.
THE SECTORS THAT BENEFIT IN RECOVERY
Successful buying into the UK’s economic recovery requires picking the right sectors, stocks and timing.
UK stock market values have already “rotated” with companies that could benefit from a strong rebound, such as travel, leisure and hospitality, received a boost at the expense of technology and other sectors that did well earlier in the pandemic . Darius McDermott, General Manager of Chelsea Financial Services, said: ‘The obvious sectors that should benefit from a strong recovery are those hardest hit by Covid – travel, leisure and hospitality.
“They should all get a boost from the pent-up demand. The recent rotation from growth to these sectors of value shows that investors believe these areas should do better as the economy reopens. ‘
For those looking at individual UK stocks, there are many positioned to benefit from the rebound.
Hugh Sergeant, UK and global recovery strategy portfolio manager at Investment House River and Mercantile, likes UK banks like Lloyds.
“They are the main beneficiaries of both the UK’s economic recovery and global reflation – and they are still valued very low,” he says. ‘We also like Whitbread, the owner of the budget hotel brand Premier Inn.
“This is a classic reopening game that will show a strong recovery in earnings in the short term and, given its strong balance sheet, will be able to invest to achieve robust longer-term growth.”
Laura Foll, who runs the Lowlands investment trust, also likes retail stocks and banks like NatWest and Lloyds.
She’s also confident about the outlook for media companies like STV and Reach, which she says will benefit from a rebound in advertising when the economy recovers.
The banks are also a favorite of Callum Abbot, co-manager of the investment trust JPMorgan Claverhouse. Despite a “significant recovery” from the lows of the pandemic, the market valuations of leading banks remain attractive.
He says a strong economic recovery will drive interest rates higher and lead to higher profits. He adds, “Banks were part of the solution to this recent crisis, not the cause.
You’ve worked with the government and the Bank of England to build a bridge over the hot parts of the crisis, with payment holidays and funding for weak companies.
“This should foster a far better relationship with the regulator, government and the public than we saw after the great financial crisis of 2008.”
For the brave, travel goods that have fallen out of favor could see a real boost as international travel continues to open up.
Sam Dicken, portfolio manager at financial services company IG, says easyJet has had the worst performance in the equity markets since the beginning of last year, down 22 percent. In contrast, shares in Ryanair and Wizzair are trading above pre-pandemic levels.
FUNDS ARE AN OPTION, BUT PICK ONES WITH UK FIRMS
For those looking to get their UK exposure from mutual funds, it is important to be sure of what you are investing in.
For example, the FTSE100 index is not particularly UK-focused when compared to the smaller company index, the FTSE250. Tilney’s Hollands recommends the Fidelity Special Situations mutual fund, adding: ‘The fund invests in UK companies of all sizes but typically has a large weighting for smaller companies. Manager Alex Wright looks for stocks that are below the radar of the broader market and are somewhat unloved but have the size to be re-valued. ‘(See fund focus opposite.)
He also likes the AXA Framlington UK Mid Cap fund, which is mostly focused on medium-sized companies, which are usually home to the more domestically focused companies. One of the top positions is the pub chain Wetherspoons, which will open almost all of its 850 pubs again tomorrow.
James Carthew of research firm QuotedData likes BlackRock Throgmorton, an investment trust that has been the best small company fund performer over the past five years. Dmitri Lipski, a fund expert at Interactive Investor, rates the River & Mercantile UK Recovery fund, but also likes commodities to fuel the UK recovery.
“Commodities are cyclical in nature and this point in the market cycle could be an attractive entry point,” he says.
“Due to long-term structural trends, sentiment towards commodities has improved – including the economic recovery from the pandemic, fears of inflation, higher infrastructure spending and the resulting higher demand for materials.”
He suggests that investors view the WisdomTree Enhanced Commodity exchange-traded fund as a “useful and inexpensive” way into the sector.
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