Investment trust managers highlight the UK shares they are favouring following the Brexit trade deal.
Embattled UK stocks could now be at a tipping point, some investment professionals believe, as a Brexit trade deal lifts investor sentiment even as the UK endures its third lockdown.
There are now opportunities in sustainability, supply chains and financial services, UK equities investment trust managers told the Association of Investment Companies (AIC), the trade body for the investment trust industry. Here’s how they think Lockdown 3.0 might affect businesses, and what the long-term outlook is for the UK now that a trade deal has finally been agreed.
A focus on sustainability
While it is still too early to tell if the UK/EU trade deal will help those companies she holds in the SVM UK Emerging (LSE:SVM) fund, manager Margaret Lawson says the certainty it brings will be a positive regardless. Lawson notes that international investors have been cutting their UK exposure over the last four years, while UK wealth managers have been rebalancing with a more global focus. This lack of appetite has helped the UK to lag other major stock markets. But “now there is an opportunity to catch up”, she argues. Lawson expects sustainability trends to help some of the companies she owns, such as Ceres Power (LSE:CWR) and ITM Power (LSE:ITM), involved in fuel cells and hydrogen, and others focused on enterprise services, cloud support and e-commerce.
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“I expect investment in supporting business resilience and strengthening supply chains to continue. UK economic recovery is likely to be led by government encouragement for sustainability and environmental improvement,” she adds.
In the financial services space, there are “still some details to resolve” after the trade deal, notes Abby Glennie, investment director on the Standard Life UK Smaller Companies (LSE:SLS) trust. She suggests this could bring opportunities for fund administrators such as JTC (LSE:JTC) and Sanne (LSE:SNN) as clients’ funds have to be realigned with the new regulatory environment. She also thinks the deal will be a trigger for asset flows to return to UK stocks, after a 2020 in which investors sat on the sidelines.
Businesses adapt to lockdowns
While the third lockdown appears to be more of a headwind than a tailwind for UK equities, businesses have become better at managing the impact of restrictions, says Mercantile (LSE:MRC) investment trust manager Guy Anderson.
“Given lessons from previous lockdowns, most companies are now familiar with the necessary operational protocols and, in many cases, better positioned. For example, homewares retailer Dunelm (LSE:DNLM) has levelled up its multi-channel proposition both prior to and during the pandemic.” His ‘stay-at-home’ themed stocks have performed well for the fund during the national lockdowns, especially retailers Pets at Home (LSE:PETS) and B&M (LSE:BME). He also holds travel and leisure names that he expects to benefit from the economic recovery post-Covid.
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The risk factors
Although the outlook for the UK appears brighter, there are still some potential downsides, managers warn. An end to freedom of movement could impact labour availability in those sectors that employed a lot of EU workers, such as retail and food production. Higher labour costs could lead to higher prices for end products, although companies have been investing more in automation to improve efficiencies, says David Smith, manager of the Henderson High Income (LSE:HHI) trust. He adds that the vaccine roll-out and removal of a lot of uncertainties should smooth the UK’s path to economic growth from here, while the stock market looks attractively valued.
Alex Wright, manager of the Fidelity Special Values (LSE:FSV) trust, says domestic-facing UK stocks look particularly attractively valued right now, with strong fundamentals. This means investors can no longer ignore the UK, which could now be at an inflection point.
“Two clear catalysts that we were hoping for have now occurred: the approval of multiple vaccines for Covid-19 and a Brexit deal,” he says. “I believe both will quickly increase the interest in UK equities from domestic and foreign investors and from corporates, as we are already seeing with increased M&A activity in the UK market. Now these two key uncertainties have passed, the incredible value in UK equities cannot be ignored much longer.”
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