Investors seeking to generate returns from UK equity markets over the past decade have faced stark headwinds, the result of both cyclical and structural factors.
The cyclical factors have included investor angst over the political climate of Brexit and the potential impact of a Corbyn-led government, and concern around the UK government’s response in the early stages of the pandemic.
The UK market also bore the brunt of the impact of the coronavirus pandemic on global economic growth, as the FTSE 100 is stuffed full of companies in areas such as oil, mining and retail, which are acutely sensitive to the performance of the wider economy.
And that composition of the market also contributes to the structural challenges faced by UK equities, as the world of low growth and low inflation, which prevailed in the decade after the financial crisis, best suited long-term equity assets in areas such as technology, which are under-represented in the UK market.
But while technology companies are relatively under-represented in UK equity indices, they are strongly present in the wider economy, and disrupting the business models of those companies that are listed in the UK, creating a narrative that the UK stock market is full of 'old economy' companies, destined to be the losers in a changing world.
As we gradually emerge from the pandemic lockdowns, the cyclical story is changing, with government stimulus, low interest rates and the vast savings pile built up by enforced saving, meaning growth and inflation are likely to rise, reversing the conditions that prevailed for many years globally, and placing the type of cyclical companies that dominate the UK market in a more positive light.
Carl Stick, who runs the £845m Rathbone Income fund, says: “The UK right now does present a lot of attractions that have not been present for the past five years. We are seeing a strong consumer rebound, and unemployment has not risen to the highest of the levels that we thought would happen. The savings rate is about 50 per cent higher than might have been expected – some of the economic data we are seeing is among the best in decades.”
He says the consensus is that globally, inflation is picking up, and this will benefit UK equities, as many of the companies on the UK market are in sectors such as commodities, demand for which rises when growth and inflation are rising, and where producers have strong pricing power.
He says the UK market is “odd” by global standards in having such weightings to banks, mining companies and oil companies, but those companies are precisely the type of stocks likely to do well in the conditions that are likely to prevail in the months and years ahead.
John Husselbee, head of the Liontrust multi-asset team, says the cyclical nature of the recovery is likely to benefit the UK market, but adds that the estimated £60bn of savings accumulated by consumers in the country adds another layer of potential growth.