“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.
“Valuations for UK equities continue to be relatively attractive and there has been significant investment from global investors into companies who derive their profits from the UK economy. This has helped drive a significant outperformance of the mid and small-cap sectors, which have a high exposure to domestic matters,” he said.
Mr Black also discussed the lure of dividend income in the UK and claimed companies here, whether big or small, place a lot of emphasis on paying them regularly.
Robert Harley, investment researcher for Bestinvest, attributed this to strong domestic fiscal management and said that dividends will continue to rise.
“Dividend yields are about 3.5 per cent at the moment, and forecast to grow by mid single-digits,” he said.
“Dividend yields in the UK are well covered by strong corporate balance sheets and yields are higher in equities right now, compared to high quality corporate and government bonds.”
While the bond market continues to struggle with low interest rates, Mr Harley claimed the superior yield and potential for capital appreciation have driven equity prices up.
“What has really been driving equity prices has been the multiple of what people have been willing to pay,” he said.
“In July last year UK equities were trading on multiples of about 9 times forward earnings, and are now trading on about 12 times forward earnings. A re-rating in equities combined with strong underlying profit growth are the things bull markets are made of.”
Market sentiment
Mr Harley said business sentiment has improved and people have been willing to pay more over this period because of Mario Draghi’s pledge last July to save the eurozone and as a direct result of increased activity in the US. However, like many of his peers, he sees the majority of opportunities outside of the FTSE 100.
“Even though the broader market in the FTSE 100 has been performing strongly, small and mid-caps have been outperforming large-caps because of the oil and mining sectors, which have suffered as a result of news coming from China,” he said.
“With Chinese growth trajectory down at the moment, after the government confirmed its focus away from investment and towards consumption, there has been a significant impact on commodity consumption.”
