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UK managers optimistic about UK economic recovery

by LLB Reporter
9th Feb 23 11:26 am

Ahead of tomorrow’s official announcement of UK GDP growth for Q4 2022, investment company managers are looking beyond a potential recession and see opportunities in sectors as diverse as banks, technology, construction and retail.

The Bank of England continues to predict a recession in 2023, albeit a shorter and shallower one than it previously suggested. UK stock markets have been among the world’s best performing recently, with the FTSE All Share Index having generated a total return of 5.81% over the past 12 months and the FTSE 100 having delivered 8.13%.

The Association of Investment Companies (AIC) has gathered comments from UK investment company managers on prospects for UK equities and where they are seeing the best opportunities.

Jonathan Brown, Co-Manager of Invesco Perpetual UK Smaller Companies, said: “Although economic growth has started to soften and this trend will likely continue this year, it is doing so from a relatively strong starting point. The UK has high levels of employment, and for the most part, consumer, business and importantly banks’ balance sheets are in robust positions.

“There are clearly headwinds but perhaps not quite as bad as some commentators would have you believe. This gives us confidence that cyclical or economically sensitive stocks, which saw something of a rebound in the fourth quarter following a difficult year, can continue to do well and these stocks are currently trading on historically low valuations. We also think that technology stocks and some growth stocks, many of which have sold off significantly, are now starting to look more attractive.”

Alex Wright, Portfolio Manager of Fidelity Special Values, said: “In our opinion, the UK market with its higher dividends offers a better prospective return than many other asset classes, including global equities. Merger and acquisition activity has been unprecedented over the past couple of years, mostly involving private equity players and US-based corporates willing to pay prices based on US valuations.

“In this environment, I favour financials, especially banks whose profits benefit from a rising rate environment. The backdrop is also positive for life insurers, whose earnings have proved resilient during the pandemic and should continue to benefit from an acceleration in the pace of pension fund re-risking. Other businesses such as Serco, the government outsourcer, benefit from a stable demand environment and offer strong contract visibility, a degree of inflation protection in its contracts and a strong balance sheet.

“Conversely, I’m wary of areas such as housebuilders and other finance dependent sectors which are likely to be badly impacted by the increased cost of finance for their customers, even if not highly leveraged themselves.”

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