We’ve been here before – most recently coming up to a year ago when Boris Johnson bounded into power – only to be left disappointed. But in recent days some respected investment experts are again beginning to make positive noises about the UK stock market.
They believe it could move up sharply in the coming months on the back of a wall of money from international investors who previously wouldn’t touch the market with a proverbial barge pole.
It’s not difficult to see why. The hope of a vaccine breakthrough to combat the evil Covid-19 edges ever closer as a result of promising clinical trials conducted by drug companies Pfizer and Moderna – and positive findings from the latest research completed on the Oxford vaccine produced by drugs giant AstraZeneca.
Once the vaccines become widely available, they should pave the way for the UK economy to return to some form of normality.
There’s also a Brexit end in sight. ‘An early vaccine roll-out could revive many of the UK stock market’s depressed fortunes,’ says Richard Hunter, head of markets at wealth manager Interactive Investor. ‘A favourable Brexit outcome would improve sentiment generally for the UK as an investment destination.’
Earlier this month, investment bank Goldman Sachs said the FTSE100 – the index of leading companies listed in London – could end next year above 7,200, the level it crashed through in March as lockdown ground the economy to a halt. On Friday, it finished at 6,351.
Yet this forecast seems tame compared to others. Tony Yarrow, founder of Oxfordshire-based Wise Investment and co-manager of two multi-asset funds, believes the FTSE100 could hit 8,500 by the end of 2021, and is convinced the market rally that began earlier this month could last 12 to 18 months.
‘Maybe the men in white coats will take me away,’ he says. ‘But when the recovery in the UK economy comes, it will be extreme and the impact on the stock market will be overwhelmingly positive.’
It’s a view shared by Brian Dennehy, managing director of FundExpert. He argues that the FTSE100 could go as high as 9,400, although there will be upswings and downswings along the way.
Unwilling to put a time on when the market could reach this level, Dennehy nevertheless says the ‘UK is very underinvested by global institutions and has not been cheaper versus the rest of the world since 1973’.
He adds: ‘With Brexit soon out of the way in whatever form, there’ll be a refocus by global investors on the huge value stored up in the UK stock market. This means the market’s advance could occur very rapidly.’ Jason Hollands, a director of wealth manager Tilney, is another UK market ‘bull’. He says the UK economy faces huge challenges – rising unemployment, lockdown restrictions and public finances in disarray.
But he feels the recent rerating of UK shares indicates that investors globally are starting to look beyond the here and now challenges – ‘and are instead staring across the other side of the valley with increasing confidence that better times lie ahead when life starts to return to normality’.
Despite the recent market rally, the FTSE100 is still 16 per cent below its level at the start of the year. By comparison, the S&P500 Index in the United States has advanced by some 10 per cent.
The FTSE’s underperformance is a reflection of its minuscule exposure to technology stocks and its overdependence on economically sensitive companies such as those involved in oil and gas, basic resources and the financial services sector – all of which have been hit hard by the pandemic.
Experts argue that any sign of either UK economic recovery or a return to economic normality will see the prices of these stocks move ahead strongly.
Where commentators disagree is on how investors can best capture any future recovery in the UK stock market.
Ketan Patel, a fund manager at EdenTree Investment Management, says investors looking to buy individual stocks should tread carefully. He believes the market is littered with so-called ‘value traps’ – companies whose shares look compellingly cheap, but are in the doldrums for a reason.
In many cases, Patel says it is a result of far-reaching structural change in their industries. Change that will continue to drag down some of the stock market’s most well-known names such as M&S (hampered by its huge portfolio of stores), BT and Vodafone (both compromised by their expensive commitment to new 5G technology). Companies, he says, where there has been a ‘massive destruction in shareholder value’.
Patel believes investors should concentrate on ‘quality’ companies that are ‘reasonably priced’ – many of which are in the healthcare and industrial sectors. In healthcare, he suggests the likes of AstraZeneca, GlaxoSmithKline and medical analytics company Relx. In the industrial sector, polymer manufacturer Victrex and filtration systems specialist Porvair.
Jeremy Thomas, head of global equities at investment manager Sarasin & Partners, also rates Relx – a company he describes as an ’80- 20′ business. One where 80 per cent of its business activities (those medical related) have remained robust throughout the pandemic while 20 per cent (its running of exhibitions) have suffered. In other words, the positives outweigh the negatives. It’s also a definition he uses to describe DS Smith, a packaging business that has benefited from the surge in e-commerce.
Tony Yarrow likes insurer Legal & General, which continues to generate healthy profits and pays shareholders an attractive dividend. He is bewildered that its share price is around £2.59 when its financial numbers suggest it ought to be around £4. He also likes construction giant Morgan Sindall – ‘a really good company’ whose share price should be ‘closer to £25 than the current £13.90’.
For those who prefer to access the UK stock market via an investment fund, Dennehy says it is vital to target funds where the underlying holdings will benefit from the expected economic recovery around the corner. Among his recommendations are Schroder Recovery, JOHCM UK Equity Income and ASI UK Unconstrained. ‘Stacks of value and opportunity in these three,’ he adds.
Hollands argues along similar lines. He says investors who’ve made sizeable paper profits from growth-orientated funds such as Scottish Mortgage should now ‘balance up the ticket’ with funds betting on UK economic recovery. Favourites include Fidelity Special Situations and Jupiter UK Special Situations.
…AND A MORE CAUTIOUS VIEW
Not everyone believes the UK stock market is guaranteed to perform well during the months ahead.
Russ Mould, investment director at wealth manager AJ Bell, says it is easy to make the case for it providing decent value but has a warning. He feels that UK equities will not be the place to be if a ‘vaccine is late or the logistics prove difficult, the virus lingers and the global economy goes into double-dip recession’.
He urges investors to build ‘downside protection’ into their portfolios through exposure to defensive utility companies – such as Severn Trent – and both gold and silver. The precious metals can be accessed through funds such as iShares Physical Gold (that tracks the gold price) and VanEck Vectors Gold Miners which tracks the performance of a basket of metal mining shares.