A rosy picture emerged for the UK economy in today’s Budget, with the Office for Budget Responsibility (OBR) expecting that later this year the UK economy will be larger than before it collapsed six years ago. But what does this mean for equity investors? The AIC has collated manager comments about the outlook for UK plc.
Interestingly, figures from the Association of Investment Companies (AIC) show strong investment company performance in the six years since the first quarter of 2008, with UK focussed investment companies dominating, despite the dramatic stock market collapse that was to follow in the autumn. The average investment company is up 44% in share price total return terms over the last 6 years to 28 February 2014. The UK sectors have performed particularly well, with the UK Smaller Companies sector up 151%, second only to the Sector Specialist: Biotechnology & Healthcare sector (251%). UK Equity Income is the third top performing sector over the last 6 years, up 87%, followed by UK All Companies (82%).
Nick Train, investment manager of the Finsbury Growth & Income Trust said:
“A London-listed, but truly global technology company told us recently that the UK is, in its opinion, the most digitally-advanced economy in the world, in terms of business take-up. Confirming our love of enabling new technologies, smartphone penetration is higher in the UK, at 62% of the population, than even the US (56%). Meanwhile, the UK’s openness to innovative ideas is mirrored in the welcome we’ve extended to hard-working and ambitious immigrants. The, to some, unexpected dynamism of the UK economy in recent quarters is, in part, based on these factors. The good news is that these are structural characteristics of the UK, rather than simply cyclical blips and can, therefore, be expected to drive growth for years to come."
David Smith, Co-Manager, Henderson High Income Trust plc said:
“We remain positive on the UK economy. Momentum in the recovery is growing and is well supported by the Bank of England’s desire to promote growth and keep interest rates low. This is further helped by pressures on disposable incomes easing, signs of wage growth returning and the underpinning of the housing market with the extension of the Help to Buy scheme to 2020. Our portfolio has maintained its exposure to domestic cyclical companies in particular housebuilders, Galliford Try and Persimmon. Continued strong improvements in returns is leading to significant cash generation and attractive dividends.”
William Meadon and Sarah Emly of JP Morgan Claverhouse Investment Trust:
“The UK economy continues to strengthen at quite a rapid rate and it is encouraging to hear just how upbeat the management of many of our domestically oriented companies are. Corporate balance sheets are strong and dividend flows remain robust. The stock market has, however, anticipated much of this good news and the valuation of equities is no longer in the bargain basement category. Compared to many of the alternatives though, equities continue to look attractive to us on a medium term view.
“Moreover, UK equities are significantly under-owned with many pension funds having substantially divested some years ago. This creates an opportunity for a company like ours which enjoys the benefits of having investors who are prepared to look beyond the short term.
“We remain tactically geared, as we continue to find plenty of UK equity investments where we think the prospective return will exceed the cost of borrowing to invest in them. Returns in 2014 are, however, unlikely to be as handsome as in 2013. Increasing concerns regarding the timing of short term interest rate rises and the slowdown in emerging markets’ growth are but two matters which are likely to make investors more cautious and returns more volatile. We will therefore need to tread carefully and invest only in the strongest and best positioned of companies. From these levels, however, we think UK equities will provide medium term investors, who are prepared to tolerate some degree of volatility in the price of their investments, with attractive real returns.”