This week, Chancellor Rachel Reeves modified her stance on the economy. Having previously adopted a doom-laden view, she now contends that ‘the best days lie ahead’. It is a significant shift that private investors cannot afford to ignore.
Reeves appears, belatedly, to have realised that Britain has a growing fan base, despite its challenges.
Major US banks are increasingly keen on UK stock markets, regarding this as a moment to acquire unloved shares, in the belief that they are poised to appreciate.
A year ago, the main motivation for buying UK shares was the hope that the companies involved would succumb to foreign takeovers.
Such merger activity has stepped up. There have been as many 20 bids for FTSE 350 companies this year.
Select: The trust holds about 50 stocks and most are FTSE 100 names, like BP, Lloyds and Shell
Yet the conviction is that more companies can evade such attempts and grow to achieve their full potential, becoming too expensive for predators. Dzmitry Lipski, funds guru at the Interactive Investor platform, sums up the mood, saying that ‘this time, it’s different’.
Paradoxically the new, more optimistic climate has partly been produced by the arrival of a new government which is likely to be in power for five years.
As a consequence, the UK is regarded as more stable than France, Germany, or the US. The conviction that Britain presents a better prospect than other G7 nations is supported by the Organisation for Economic Cooperation and Development (OECD) which this week upgraded annual growth for the UK by 0.7 per cent to 1.1 per cent. The body has also raised its forecast for 2025.
Alexandra Jackson of the Rathbone UK Opportunities fund says: ‘The UK is no longer an economic outlier. GDP is bouncing back. Inflation is close to target – and sterling is roaring ahead.
‘But share valuations still suggest that UK shares are still undervalued. The UK market is trading on a price-earnings multiple – a closely-followed indication of value – of 11.5 times against 18.7 times for the MSCI World index. The US is higher still.’
Fears that Reeves’s first Budget on October 30 will be full of tough measures is causing some investors to sit on their hands.
But it is worth exploring the opportunities, especially one investment trust which plans to make the most of current conditions. Simon Gergel, manager of Merchants, a UK companies trust established in 1889, believes that we may be at ‘the start of something special’.
Richard Knight, the trust’s deputy manager adds: ‘We like to take advantage of a moment of dislocation.
‘The UK stock markets have been under a cloud of negative sentiment.
‘But they are not only diverse, they are also undervalued and so are a wonderful place right now to find brilliant ideas.’
The trust holds about 50 stocks. Most are FTSE 100 names, like BP, Lloyds and Shell.
But it also invests in housebuilders like Barratt, which are set to benefit from Reeves’s promise to deliver 1.5m homes over the next five years.
The portfolio also contains FTSE 250 index companies such as IG Group, the spread-betting platform.
The members of the FTSE 250 tend to be more domestically-focused, but Keller, the geotechnical engineering contractor, operates largely in the US on projects such as the construction of a stadium for the Dallas Cowboys American football team.
Keller’s shares have doubled over the past 12 months.
Merchants’ mission is to provide growth, but also an income. It has consistently paid a dividend for more than 40 years, but companies are not purchased solely because they offer a good yield. Gergel says: ‘The main reason for buying a share is we think we can make money.’
In this quest, Gergel, Knight and the team look for long-term themes, such as demographic change and decarbonisation and the move away from fossil fuels.
On this basis, it may seem strange that BP and Shell are among the top holdings, but Knight defends the decision.
‘The nation is going to need oil and gas for a long time, and getting it locally is both cheaper and greener. Both these companies have also got incredible transition plans.’ he says.
Since decarbonisation is driving demand for copper, an essential element in wind turbines, Merchants has a holding in Atalaya Group which mines it in Spain.
Some investors may shrug their shoulders at oil and gas. Others will take issue with Merchants’ stake in British American Tobacco (BAT).
Gergel acknowledges that this holding enables the trust to offer a 4.8 per cent dividend yield.
But he adds that he and his fellow managers seriously consider the social issues of investing in tobacco, putting pressure on growers to change labour practices on farms. He points out that BAT has a ‘next-generation’ product range of less harmful products.
‘Oversold’ out of favour stocks feature in the portfolio, Burberry being a recent purchase.
Shares in the British fashion house, established in 1856, have just enjoyed their best week since 2009 having slumped by 50 per cent over the past six months.
This has come against the background of a consumer slowdown in China and the current collection’s lack of appeal in almost all regions.
Knight comments: ‘This is a brand with heritage, thanks to its classic trench coats and its check pattern design.’
The Merchants team believes that Burberry can return to acclaim under its new chief executive Joshua Schulman and chairman Gerry Murphy.
Gergel says: ‘We think it’s a classic turnaround situation.’
Over the past three years, Merchants has delivered a return of 32p, against the 19 per cent average for its sector.
Shares in the trust stand at a negligible discount – 0.7 per cent – to the trust’s net asset value
Since other trusts are at double-digit discounts, this underlines Merchants’ appeal to those seeking to brighter future for UK plc.
OTHER UK PLC OPTIONS
The reassessment of the UK stock markets is a signal to take a critical look at your whole portfolio. It is easy to assume that you have a well-diversified spread of holdings when, in fact, you are overexposed to US tech giants which make up a large percentage of many popular funds and trusts. F&C is a popular trust but American tech titans – Apple, Amazon and the rest – dominate the portfolio.
When building a UK portfolio, it also makes sense to check that you are achieving a balance.
Interactive Investor’s top tips include City of London, a conservatively-managed trust which backs the FTSE 100’s big names like BAE, BAT, NatWest and HSBC.
Interactive Investor’s Lipski also cites Artemis Income Fund which also invests in such FTSE 100 names as Relx and Tesco and JP Morgan UK Equity Core Fund whose largest holdings are AstraZeneca, Shell and HSBC. FundCalibre favours Murray Income another trust that invests in the FTSE 100 stalwarts – and one of my bets on the revival of the UK markets.
If you are interested in having a flutter on the resurgence of smaller enterprises, you may favour Oydssean trust whose managers deploy ‘constructive corporate engagement’ to bestir companies to improve their performance.
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