UK equities: Rebound points to UK recovery


    Earlier this year a UK triple-dip recession seemed almost inevitable. Endless talk of austerity, growing poverty and unemployment figures helped fuel these fears and raise concerns that recovery was still a long way off.

    With domestic, and developed markets in general, stuttering since the stock market crash of 2008, plenty of investors responded to anaemic growth forecasts by seeking exposure to emerging market economies. Last year these sentiments were certainly at the forefront of most of our minds, yet now an altogether different attitude has started to emerge.

    The word on Wall Street and in the City of London is that UK equities are booming. Newswires have reported, almost on a daily basis, on the FTSE 100’s record-breaking run, and the FTSE 250 has fared even better rising 40 per cent in sterling terms over the past year.

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    The MSCI Bric index, by comparison, rose less than 1 per cent in sterling over this same period.

    Some would argue that the rise of the FTSE 100 is not directly linked to UK productivity – roughly 80 per cent of the UK’s large-cap index earnings come from abroad. However, news of the FTSE 250’s surge, which is largely made up of domestically-focused companies, suggests that the long awaited recovery is finally in motion.

    UK second-quarter GDP figures showed growth up by 0.6 per cent, which is double the rate of growth seen in the first three months of 2013.

    This follows positive news from the UK Purchasing Managers Index survey and the British Chambers of Commerce, who both announced improvements in profitability, employment levels, manufacturing and exports.

    Claudia Panseri, global strategist for Societe Generale, said: “When considering how GDP is rising and the UK economy is gaining momentum, the potential is high.

    “The arrival of Mark Carney is also important and we expect, in the next months, that he will keep interest rates low and keep QE at the same level until the economy restrengthens.”

    Although Ms Panseri is bullish on the large-cap sector, particularly as a result of its heavy US exposure and cheap exchange rates for exports, she says the real opportunities currently lie in smaller company investment.

    “Our main interest is not in the FTSE 100, but the FTSE 250, as consumer-related stock and real estate look very promising,” she said.

    “A lot of small and mid-caps should benefit from increasing consumer consumption and the improving real estate market, linked to a rise in housing prices.”

    Much has been made of the government’s Funding for Lending Scheme’s reinvigoration of the UK housing market. Furthermore, with employment and savings levels increasing, consumer spending is also said to have risen and improved the nation’s economic prospects.

    “The labour market has proved remarkably resilient and with inflation falling, the squeeze on real incomes is finally abating and enhancing the prospects for consumption,” according to Richard Black, fund manager of Legal & General’s UK Equity Income fund.

    “This backdrop is supportive against a broadly challenging global growth picture, so the UK has been a destination of choice for global investors.