UK Economy restart

Written by Jennifer Hill

June, 2021

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Value and growth winners from the recovery

Which UK sectors and companies are poised to do well amid economic recovery? Citywire asked several wealth managers and advisers to name their top value and growth destinations.

Five years after the Brexit vote in June 2016, the UK finally seems to be emerging from its long period of economic gloom. The promising outlook has seen asset allocators increase exposure to our home market. 

Wealth manager Ravenscroft turned ‘very positive’ on UK equities late last year due to several factors. 

‘The UK looks set to be one of the strongest amongst advanced economies over the next year or two thanks largely to the successful Covid-19 vaccination programme, pent-up demand and supportive fiscal and monetary policies,’ said chief investment officer Kevin Boscher. ‘At the same time, UK assets – equities in particular – look cheap in absolute and relative terms, even after the recent rally.’ 

The UK market stands to be a key beneficiary of the acceleration in economic activity, both domestically and internationally, due to its relatively high weightings to more cyclical and value sectors. It is attractive from an income perspective, too, as many companies resume dividend policies. Yet it remains under-owned having suffered substantial outflows since the referendum. 

Nexus Investment Managers, which runs portfolios for Nexus Independent Financial Advisers, also sees many reasons to invest in UK equities. It increased allocations in November and again in February, taking them from 14% last autumn to 20% this spring. It favours funds that give clients exposure to both value and growth investment styles. 

‘UK fund managers we have spoken to are confident that there is a wide choice of UK companies with sustainable economic moats, clear visions and excellent growth prospects,’ said portfolio manager Lucy Kupczak. 

We spoke to three fund buyers to reveal their top ‘value’ and ‘growth’ plays in UK equities. Here’s what they had to say: 

THOMAS McGARRITY
HEAD OF EQUITIES – BRITISH ISLES
RBC WEALTH MANAGEMENT
 

The UK consumer space offers various opportunities connected to the dynamic of pent-up demand meeting high levels of consumer savings. We believe two interesting areas in which to seek opportunities are traditional retail on the value side and the repair, maintenance and improvement, or RMI, industries on the growth side. 

The pandemic has accelerated several existing trends in the retail industry, including the channel shift to online and appeal of discount offerings. We believe it is going to be a case of the strong getting stronger in the post-Covid world as weaker retail players retrench or go out of business in what will likely remain a tough environment given the structural shifts at play. However, fewer competitors should present opportunities for those multi-channel retailers that possess strong online platforms alongside well-invested bricks-and-mortar estates, as well as value orientated retailers with compelling low-price propositions to take market share. 

RMI has been one of the most robust areas for consumer spending over the past 12 months as many UK consumers have spent excess savings on improving their homes. We believe the medium-term outlook for RMI spending remains bright, despite the likely significant pent-up demand for spending in other discretionary areas, such as travel and leisure activities. 

With working from home trends changing the way many people work and live, we believe consumers are likely to continue to spend more time at home even when the pandemic ends. Accordingly, the increased focus on home improvement spending could be a multi-year trend. 

WILLIAM DE BAER
CHARTERED WEALTH MANAGER
CASTERBRIDGE WEALTH
 

We believe the energy sector and specifically the oil majors are poised to do well as the global economy continues to recover. BP and Shell are the value plays that were hit hard at the height of the pandemic and their recovery to date sees them some way off their 2019 highs when the oil price was at current levels. 

Through the worst of 2020 they cut dividends and slashed capital expenditure to reduce their variable costs where possible. Today, these companies are leaner, potentially providing significant operational leverage. As the narrative has shifted towards inflation, whether transitory or not, we expect the re-opening of economies and the supply/demand dynamic to push oil prices higher, serving to boost these companies’ cashflows and profitability. 

The prospect of progressive dividend policies and renewed share buybacks should further bolster the shares. We are very aware that the ‘green revolution’ is a longer-term journey and both these companies are heavily dependent on fossil fuels, but we are encouraged by their ambitious environmental targets. 

On the growth side we favour select technology companies that provide the ‘pick and shovel’ technologies to broader themes. One such company is Keywords Studios, which provides technical services to the world’s leading video gaming companies. Online team play is increasingly immersive and interactive, making home video gaming and eSports the new social media platform. 

This trend will continue to grow beyond the ‘stay at home economy’. While the sector will be exposed to short-term volatility related to inflation expectations and rising bond yields, these pick and shovel technologies that help drive broad themes should be able to deliver excellent growth opportunities. 

BEN YEARSLEY
INVESTMENT DIRECTOR
SHORE FINANCIAL PLANNING
 

I’ve always been a believer in having balanced investment portfolios. I’m not necessarily talking about a 60/40 bond equity split, more about having both growth and value in a portfolio. For long-term buy and hold investors it leaves a foot in both camps and hopefully ensures that while your portfolio will never be the best-performing one it also shouldn’t ever be the worst. 

That has played out vividly over the last year. Before ‘vaccine Monday’, growth was still the flavour of the day, whereas in the immediate aftermath value was the clear winner. That went across the market cap spectrum. 

Going forward I think small and mid-caps (SMID), both the growth and value side of the spectrum, will do well. There are two different drivers, but they both share one common theme – renewed interest in UK Plc. Value is benefiting from the reopening of trade and the undervalued nature of value SMID-cap stocks. As well as the reopening trade and expected consumer boom, growthier names also benefit from the flow of quantitative easing and stimulus packages, plus long-term trends for things like digitalisation. 

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