The UK equities to own for the next part of the economic cycle

Walker’s view is that while there is likely to be a period of “disinflation” in the UK when the overall pace of price rises in the economy slows but prices don't actually fall.

He said that while there was a consensus that UK equities remained cheap, there was much discussion around what might be the “catalyst” to cause investors to look more favourably at the asset class. 

The latest Investment Association data showed a further £835mn was withdrawn from UK equity funds in March despite the FTSE 100 being the second best performing major market in 2022.

But Walker said investors did not need to focus on finding a catalyst that would lead to a change in sentiment towards the UK market, as he felt some of the dividend yields already on offer meant investors could simply profit that way. 

Bank shares were expected to perform well as interest rates rose, and in most cases they have done, but Walker is retaining his positions in those shares.

He said that just as higher interest rates boosted the returns banks could achieve, so any interest rate cuts will hinder the ability of banks to generate outsized returns in future. 

But Walker is not taking this a sign to pocket any gains from bank shares, as he believes any slowdown in revenue as a consequence of rates being cut will take multiple years to impact bank bottom lines. 

One bank stock on which he is particularly keen is NatWest, the FTSE 100 lender. He says the stock currently has a yield of 8 per cent, “and at that level, you don’t really need very much to change, if you just had four dividends a year at that level for say, three years, plus the benefits of share buybacks”.

Additionally, if inflation over the coming 10 years is on average higher than it has been over the previous decade, that would imply more periods where bank earnings are able to grow. 

Bargain basement?

Walker owns the type of cyclical stocks frequently described as “value” - an investing style with which Invesco is associated. 

But over the past year he has also bought the shares of Reckitt Benckiser and Unilever, which are more often associated with the growth style of investing, have caught his eye.

He says the shares of both businesses were cheap in 2022, and so aligned with his valuation centred investment style, but going forward he remains keen on Unilever because: “There is research showing that some Unilever products are less price elastic than some tobacco company products, and thats obviously counter intuitive because tobacco is addictive. But that shows the resilience of Unilever as a business.”

The final area on which he is focused is utilities, as he feels the company earnings from these assets are direct;y linked to inflation, and so offer long-term protection.

Walker acknowledges there is an element of political risk associated with utilities, but believes the valuations mostly reflect this. 

Steven Andrew, a multi-asset investor at M&G, says one of the characteristics of markets when recessions happen is that investors become less concerned about valuation and focus instead on the reliability of a company’s earnings. 

Andrew has in recent times flitted between owning US tech stocks, which are generally regarded as highly valued, and bank shares depending on whether expectations were for interest rates to rise further or not. 

But he feels that in a time of economic strife “bank earnings have proven over time to be more volatile, and that is exactly what shareholders don’t want at that time, so the relative cheapness of bank shares won’t be something that investors particularly care about. It is rare in recessions for things that aren’t expensive to do well when we are on the doorstep of a recession. And that may apply to large  ”

Andrew also recently began investing in long dated UK government bonds for the first time since 2014, saying the yield, at over 4 per cent on the 30-year maturity, is very attractive right now.

david.thorpe@ft.com