Interactive Investor

The UK shares the pros are backing to play post-pandemic recovery

Fund managers are positioning to profit from the ‘reflation trade’, we name the shares they are backing.

24th March 2021 14:47

Kyle Caldwell from interactive investor

Fund managers are positioning to profit from the ‘reflation trade’, we name the shares they are backing.

One of the dominant themes over the past year has been fund managers seeking to profit from the ‘stay at home’ theme, in response to the collective effort to halt the spread of the Covid-19 virus.

As things stand today the government’s ‘stay at home’ rule is about to end (on 29 March), but millions will continue to work from home – as this guidance remains unchanged. On 12 April, at the earliest, some businesses will be able to re-open their doors for the first time in months. 

As a result, various UK fund managers are increasingly looking to profit from the post-pandemic recovery. In particular, fund managers have been boosting exposure to economically sensitive cyclical shares. Such companies are expected to perform well under the ‘reflation trade’, a term used to describe a combination of both the global economy and inflation rising sharply at the same time.

William Meadon, portfolio manager of the JPMorgan Claverhouse (LSE:JCH) investment trust, has been turning his attention to the potential winners of the economic recovery. He says: “The impending economic recovery particularly makes previously unfashionable ‘value’ stocks, like banks, look much more attractive.”

Meadon picks out Next (LSE:NXT) as one of his favoured plays. 

“After a challenging year, we are now focused on the recovery. Next is an example of a company which, in our opinion, continues to stand apart from its competitors.  Its online offering is ‘best in class’ in terms of efficiency and customer interface and, in our opinion, its management team is without peer. All in all, Next looks well placed to benefit from consumers starting to spend some of their lockdown savings,” says Meadon.

Jonathan Brown, manager of the Invesco Perpetual UK Smaller Companies (LSE:IPU) investment trust, has also positioned to profit from the reflation trade.

Brown told interactive investor’s Funds Fan podcast that he started upping exposure to cyclical shares towards the start of the pandemic, but has in recent months been increasing weightings.  

"We found a lot of businesses that we liked the look of had been overvalued historically suddenly became really quite attractively valued in the sell-off in March last year,” he says. 

Among the shares Brown added were Gym Group (LSE:GYM), Grafton (LSE:GFTU) and pub firms Mitchells & Butlers (LSE:MAB) and Fuller Smith & Turner (LSE:FSTA)

Brown then increased exposure to other cyclical holdings from the industrial and leisure sectors later on in the year, ahead of the vaccine announcements.

He, however, cautions that some cyclical shares have seen their share prices rise notably since the vaccine announcements in November.

“We see upside in quite a few of these things still, we think some of them are 20% to 30% undervalued when you look at historic levels of profitability.

“But some have run really quite hard. For example, we have been taking profits in one or two of the pub companies – they don’t look cheap by historical standards anymore. We do see it as a strong trend and as much as anything people are keen to get out and do the things they have been unable to do over the preceding year.”

Unwise to rule out some of the 'working from home' winners 

While fund managers are looking ahead to the potential future winners of the post-pandemic recovery it would be unwise to rule out some of the ‘working from home’ beneficiaries continuing to deliver for investors.

George Luckraft, portfolio manager at AXA Investment Managers, notes that despite the welcome progress of vaccines for Covid-19, many people will be working from home throughout 2021. In addition, many more will be trying to achieve a greater work/life balance by spending at least some of their working week working from home.  

As a result, he says the ‘working from home’ theme is not going to unwind anytime soon.

“Consumers have saved up hundreds of billions as a result of lockdown and while things might slowly start re-opening, many offices will still remain closed or restricted to lower occupancy levels for some time, with working from home remaining a core trend for many people,” says Luckraft. 

“Households will likely be spending large portions of their savings on home improvements and making their surrounds more comfortable, and there are many undervalued UK businesses set to benefit from this trend as the UK starts to re-open its high streets.”

Luckraft, lead manager of the AXA Framlington Monthly Income fund, is backing large home furnishing and DIY brands, including DFS (LSE:DFS), ScS (LSE:SCS) and Topps Tiles (LSE:TPT).

He adds: “They have maintained a large online market share for home improvements and a lot of their competition has not made it through the pandemic. Even as lockdown slowly lifts, with many people likely to opt for home working where possible, companies like these will be the ones people turn to as they look to improve their working and living environment.” 

Will reflation trade quickly run of steam?

While the consensus view is that the reflation trade has plenty of mileage, a respected bond fund manager has cautioned markets are getting carried away with the idea.

Ariel Bezalel, who manages the Jupiter Strategic Bond fund, one of interactive investor’s Super 60 choices, says deflationary forces will keep inflation at low levels in the coming years.

“My view remains that the reflation trade proponents may have got ahead of themselves and that we will remain in a low-interest-rates-for-longer environment,” says Bezalel.  

“While there will undoubtedly be a spike in inflation once economies reopen due to starting off from such a low base, I expect this will fade after a few quarters as growth eventually disappoints again. Structural inflation everywhere is being kept in check by the combined drivers of too much debt, ‘zombification’ of the corporate sector, ageing demographics, and disruption from globalisation, technology, and low-cost labour.”


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