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Gloom About UK Economy Lifts as Investors Anticipate Gains for UK-Focused Businesses and FTSE 100

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Long-term pessimism about the UK economy may be coming to an end, according to big investors who believe that UK-focused businesses and the FTSE 100 are set to gain. For years, there have been outflows and companies like CRH have moved their stock listings overseas. However, the UK’s FTSE All Share index is now valued at around £2.28 trillion, which is roughly the same as Apple’s market value. British companies are also trading at a record discount compared to global equities.

Factors such as high government debt, crumbling infrastructure, political turmoil, and 14 interest rate hikes since late 2021 have contributed to negative sentiment. Despite these challenges, the UK economy has not entered recession as feared, and official statisticians have revised data to show that the country recovered from COVID-19 earlier than previously thought.

UK-based investors are increasing their holdings of domestic businesses and taking advantage of the low valuations of the FTSE 100. Daniel Lockyer, senior fund manager at Hawksmoor Investment Management, stated that it feels like the UK has passed the peak of pessimism. Lockyer believes that the negativity is slowing, and getting in at the bottom and capturing the start of a turnaround is key to making money in any market.

Since 2016, a cumulative £76 billion has flowed out of UK equity funds, with the bulk of outflows occurring in the last three years. In contrast, global equity funds have seen £507 billion of net inflows during the same period. UK pension funds have significantly reduced their allocations to UK equities, from 53% 25 years ago to just 6% today.

Consumer stocks are currently outperforming as investors bet on the UK’s cost of living crisis becoming less intense. Invesco’s head of UK equities, Martin Walker, stated that the UK’s economy will be better than expected, leading to a modest overweighting of UK consumer staples in his portfolio.

The FTSE 100 is trading at a lower price-earnings ratio compared to the wider Stoxx Europe 600, which presents a real opportunity for investors to buy its companies at a discount. Economists polled by Reuters expect the UK’s growth this year to be 0.3%, trailing behind the euro zone but a stark contrast to predictions of a recession at the end of 2022.

The Bank of England is expected to hike rates again this month, putting additional stress on homeowners due to the refinancing of fixed-term mortgages at higher costs. However, wages are now growing faster than prices, and energy bills are expected to drop to a two-year low next month. Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, stated that pay rises mean British households can maintain their current level of real expenditure under any plausible scenario for official interest rates.

Fund managers are also showing confidence in UK stocks. Leigh Himsworth, UK fund manager at Fidelity International, is looking to pick up UK retailers, and it’s also time to invest in the UK real estate sector. Neil Birrell, Chief Investment Officer at Premier Miton, has increased the proportion of UK stocks in his portfolios to the highest level since 2019, with a focus on consumer businesses.

While there are good economic reasons to predict an upturn for UK stocks, fund managers believe that further steps from policymakers are necessary to revive interest in British equities. Premier Miton is lobbying for a new tax-efficient investment vehicle for UK stocks, while Fidelity suggests introducing a new national savings product that could provide capital to British businesses.

Savvas Savouri, Chief Economist at Toscafund, believes that quality UK companies don’t have a strong enough domestic investor base. He sees UK equities as an “abject failure” and highlights the need to value British companies more.

More detail via Reuters here… ( Image via Reuters )

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