As the UK edges closer to normality, our star columnist talks to a star fund manager about prospects.
I’m looking forward to Monday. At last, a chance to wine and dine without having to expose body and soul to the elements. For the record, my first meal outside (early May bank holiday) was a gourmet disaster as rain and wind turned our Indian street food into soup - and our bodies to ice.
Another giant step towards the full reopening of the economy can’t come soon enough. And it’s not just consumers who are waiting for the nation’s pubs and restaurants to get back to near full swing. Some investment fund managers are also salivating at the prospect.
Despite the strong bounce back in the UK stock market over the past year (over the six months, even more so), some fund managers believe Monday marks a new dawn. The stock market, they argue, still has a lot of catching up to do. Both in absolute and relative terms. It’s cheap compared to other global markets and despite recent gains, it’s still not back to where it stood at the end of 2019 post the anointment of Boris Johnson.
I had a super chat with Alex Wright of Fidelity earlier this week, ‘son’ of Anthony Bolton in light of the fact he currently runs the two funds Bolton made his great name on – Fidelity Special Situations and Fidelity Special Values (LSE:FSV) – the former being a £2.4 billion investment fund and the other a £870 million stock market listed investment trust.
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On his own admission, Mr Wright has had a difficult time of it in recent years. His particular investment style – investing in undervalued UK companies in the hope their value will at some stage bubble to the surface like glittering gold – has been badly out of fashion.
But since the stock market woes of Spring 2020, Mr Wright has had something to smile about. Both investment funds have bounced back somewhat spectacularly – Special Values more so than Special Situations, primarily because Wright has skilfully used the investment trust’s ability to borrow cheap money to increase its exposure to UK equities.
It’s paid off quite handsomely (clever Mr Wright). Yet he believes it is only the start of a new dawn. He argues that the UK stock market could advance strongly in the coming months if the economic recovery is as strong as some are predicting. Only a few days ago, the Bank of England said the UK economy would enjoy its strongest growth this year in more than 70 years – although it was keen to emphasise that growth would represent more of a bounce back than a boom.
Wright, who runs Special Situations and Special Values with near identical portfolios, is putting his faith in housebuilders and anything to do with the art of constructing homes – from brick makers (Forterra (LSE:FORT)) through to manufacturers of showers (Triton Showers, owned by Norcros (LSE:NXR)) and DIY facilitators (B&Q, owned by Kingfisher (LSE:KGF)). He also likes high yielding insurance companies (the Aviva's (LSE:AV.) and Legal & General's (LSE:LGEN) of this world).
It’s hard not to be enthused by Wright’s exuberance, but he’s certainly not the only investment manager or expert who feels the UK stock market is the place to be investing in at the moment. The fact that bids are being made for UK listed companies (St Modwen Properties (LSE:SMP) and John Laing (LSE:JLG)) suggests that some clever people in the investment world believe the stock market and its constituents still offer excellent value.
In a recent note penned by Altaf Kassam, head of investment strategy and research at State Street Global Advisors, he predicted that the FTSE 100 Index could outperform other global indices this year. A combination of a faster and stronger recovery in the economy and consumer spending, he said, “could provide a boost for UK equities”.
In a similar vein, Citi Private Bank predicted that both UK and European equities offer “particularly good exposure to the areas we favour globally – Covid cyclicals, value [Mr Wright’s specialism], mid-caps, high dividend yielders [Aviva and Legal, General etc] and dividend growers”.
So, it’s a no-brainer. Pile into UK equities?
Well, not necessarily. Fidelity’s latest investment outlook is not as confident about UK equities as Mr Wright is. Yes, it talks about an economy that in the future responds positively to high spending and low unemployment with the release of pent-up demand “inspiring and maintaining confidence”. But it also mentions the possibility of a “negative feedback loop” – resulting from rising unemployment and lower spending by both consumers and businesses.
In other words, we’re not out of the woods yet. Things could go either way.
Then, there are the cautious views of equity specialists such as Peter Spiller of Capital Gearing Asset Management. I spoke to this veteran fund manager at length earlier this month. He equates equity markets to milk in a pan.
“There’s a lot of heat under the pan,” he says, “and the froth is rising as evidenced by the soaring price of bitcoin and the growth in special purpose acquisition companies (SPACs) looking for investment opportunities. What we don’t know is how high the side of the pan is and at what stage the milk spills over.”
In other words, Mr Spiller believes markets are heading for a correction. For the record, 8% of the investment trust he manages with his colleagues (Capital Gearing (LSE:CGT)) is currently invested in UK equities. The rest is split across bonds, gold, cash and specialist property companies.
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So, by all means invest in the UK stock market. As Wright says, its time in the spotlight may well come in the months ahead. But be sensible. Diversify your asset exposure and drip feed your money into markets – and remember: nothing in the world of investments is ever guaranteed.
Enjoy Monday. Hug away (I can’t wait) and eat out in the knowledge that your meal won’t be spoilt by May showers and howling winds. You’ll be inside!
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