It is still harder than usual to foresee the path for sterling, gilts, credit, UK equities and the relative performance of different sectors and large companies relative to smaller concerns. With regards to JP Morgan Asset Management, the company continues to take a neutral approach to UK equity investing.
Indeed, UK economic data looks mixed: UK unemployment has fallen to its lowest level since 1975, to just above 4 per cent. Typically, low unemployment would speed up wage growth, but the weak pound means inflation at about 3 per cent is wiping out the 2 per cent nominal wage growth, resulting in negative real wage growth. As real wages have been shrinking, consumers have been saving less.
However, there are reasons to be optimistic.
A lower savings rate has been helpful for the economy in that retail sales and consumption in the UK held up better than they otherwise could have done just after the fall in sterling. It goes without saying that at 60 per cent consumption, the UK consumer is key for the nation’s economy. However, the dip in consumer confidence could damage more domestically orientated companies that rely on UK consumption.
The economy also continues to be supported by UK businesses. While investment intentions surveys for both manufacturing and services companies took a hit last year, they have since recovered to pre-referendum levels, with the Bank of England estimating that quarterly growth in business investment will contribute 0.5 per cent to GDP growth over the next quarter.
Large-capitalisation multinational companies listed in the UK’s FTSE 100 source nearly 70 per cent of their revenue from abroad, so when sterling falls, their stock prices tend to rally. After the UK’s referendum on EU membership in June 2016, sterling fell dramatically and the FTSE 100 rallied, providing some of the best local currency equity returns for 2016. So, if sterling rises, the more domestically focused mid and small-cap stocks should outperform.
UK equities remain a decent bet for the future, when considered against other options, but the exceptional uncertainty investors face over the next few years should counsel against taking large sector or style bets in one’s portfolio.
UK fund managers have had a large bias towards small and mid-cap UK equities over the past few years, which has paid off handsomely. In fact, the average weight of an all-cap UK equity fund to the small and mid-cap space is above 40 per cent, whereas the benchmark weight of small and mid-caps in the FTSE All Share is only about 20 per cent.
