I’m sure most of you will have watched ‘Deal or No Deal’ at some point. Hosted by Noel Edmonds, it would see a contestant choosing one of 22 boxes – each containing between 1p to £250,000 – and attempting to win as much as possible by gambling on having a higher amount in their chosen box.
The show was a big hit, and an element of its success was there was very little skill involved, just luck.
Although many would not like to admit it, there has been an element of luck about investing in UK equities for the best part of five years, as the overhang of Brexit saw the strength or weakness of sterling dictate investment strategy – rather than fundamental valuations.
But a Brexit agreement (of sorts), coupled with the vaccine bounce at the back end of 2020, has given UK equities some much needed certainty. The question is, is it enough to drive a full recovery?
The International Monetary Fund believes the UK is in line for a strong economic bounce in 2021, with growth projected at 4.5% (versus 4.3% for advanced economies).
That puts the UK in bargain territory, particularly when you consider it is the only global market which is still down on its pre-Covid levels.
The macro backdrop
Optimists will hope the Brexit deal will finally bring investors off the sidelines. But I would urge some caution as the ‘deal’ only covers goods (where the UK ran a trade deficit of £100bn in 2019) and not services – essentially the EU has negotiated on their priority, not the UK’s.
There are also promising signs on the M&A front. Schroder Income Growth manager Sue Noffke says there was a trend of inward M&A activity prior to the pandemic, but she feels this is starting to gain momentum again – adding that “a large number of companies are trading on very depressed price-to-earnings ratios, similar to the situation we saw in the wake of the global financial crisis”.
As we know, the UK has a tilt towards value within its index with the likes of financials, energy, utilities and miners all well represented.
The rotation between growth and value in recent months has been as pronounced in the UK as it has been anywhere in the world.
But while there has been a significant uptick in performance, it is from such a low base that it would be unsurprising if major gains were not made from a persistent rally from this point – although this is dependent on numerous factors.
A lot of these larger, value-based companies are tied to dividend payments and there is hope dividends could recover faster than initially hoped, boosting the likes of banks and miners.
However, Murray International Trust manager Bruce Stout says while markets have tended to recover quickly from a recession, the last six ‘dividend recessions’ the market has seen in the past 100 years have taken much longer to recover from – with companies taking four to five years to rebuild their balance sheets.
Post-Covid and looking beyond the FTSE 100
Much will come back to the length of the Covid recovery. The UK index has travel, leisure and services companies (among others), all of which have had their sales decimated.
Does all this last until 21 June? Will the big boom come for UK equities with an economic restart once social distancing ends given we are so far ahead on the vaccine rollout? If so, this could add fuel to the value rally.
We have always been big fans of small- to medium-sized businesses in the UK, where there is a huge amount of choice. Many have also shown resilience in the middle of Brexit and the pandemic sell-off.
The likes of AXA Framlington UK Mid-Cap and Unicorn UK Smaller Companies are two strong examples of funds investing in companies which should feel the benefit of the vaccine rollout far quicker than the more internationalised FTSE 100, where our optimism is more reserved.
Juliet Schooling Latter is research director at FundCalibre