Strong prospects for UK equities

This article is part of
Guide to investing in 2020

Strong prospects for UK equities

With the Conservative Party winning the December General Election with a majority of 80 seats the UK is now certain to leave the EU on 31 January, bringing about what many would say is some much sought after clarity for investors.

In the years running up to the elections, the massive weight of political uncertainty in the UK led to weak business sentiment, which contributed negatively to GDP growth and has meant that a lot of investors have been reluctant to put their money into UK equities.

But that could all the changing.

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Sheridan Admans, investment manager at the TC Share Centre Multi Manager Funds, says: “With more clarity added after the 12th December election the Conservative win means we are looking to tilt our UK exposure across the capitalisation spectrum to a greater focus on mid and small caps once again. 

Investing in the UK

“We continue to see increasing value in UK domestically focused companies, which will likely see us add to the region over the course of the year.”

According to Alastair Mundy, portfolio manager at Investec UK Special Situations Fund and Temple Bar Investment Trust, there are several ways in which Brexit will favour UK domestic earners over international earners:

  1. Sterling could strengthen
  2. The UK is due a budget, which could see voters thanked for making the ‘right’ decision, and in which the government could commit to higher fiscal expenditure
  3. Many consumers and companies have probably been delaying consumption and investment, so there could be a rebound in activity
  4. Overseas bidders will be more confident about the economic outlook and may seek to buy up cheap UK assets
  5. International equity buyers, who have probably been avoiding UK equities and particularly domestic earners, may be tempted (or forced) back into the market.

Jon Stopford, portfolio manager at Investec Diversified Income Fund adds: “We expect some further recovery in sterling and UK domestic stocks on reduced uncertainty and the removal of the tail risk of market-unfriendly policies, although a fair amount of this is already in the price, given the polling in advance of the election.”

According to a recent Association of Investment Companies (AIC) fund manager poll, UK equities has been tipped as a top earner for 2020.

The study found that the UK is the region most investment company managers believe will produce the best stock market return in 2020 according to the annual poll.

The poll was carried out with AIC member investment company managers between 13 November and 2 December 2019.

Despite the UK’s challenges over Brexit and a General Election, a third of respondents (33 per cent) feel the country has the best prospects for the coming year.

Despite the survey being done prior to the results of the election, it is thought the sentiment from fund managers will not have altered that much following the vote.

Laura Foll, co-manager of Lowland Investment Company and Henderson Opportunities Trust, says: “Since the EU referendum result, the UK equity market has been an easy one to ignore. 

“This is backed up by fund manager surveys where the UK languishes at the bottom; in other words is often the largest ‘underweight’ position globally. 

"An interesting theme in 2019 has been a substantial pick-up in M&A interest within the portfolio. This is a trend we expect to accelerate on any resolution [on Brexit].”

Although the Conservative Party win has provided some economic clarity, it is a clarity for the short-term, as it is likely the markets have already shifted their focus to look at what happens next after the UK’s expected exit from the EU in January.