If you have invested in the UK equity market over the past 10 years, you’ll have seen your wealth struggle to generate good returns due to a catalogue of cyclical, structural and political issues.
There has been angst over Brexit and the potential impact of a Corbyn-led government. In addition, there have been concerns about the government’s response to the pandemic, particularly in the early stages.
Because the FTSE 100 is full of companies in areas such as oil, mining, and retail, the circumstances presented by the pandemic has hamstrung our domestic economy more than other developed markets. For example, the US market has more tech and healthcare companies which means it was able to do better during the various lockdowns and periods of social distancing.
But what can we expect to see from the UK markets in the next few years?
When growth and inflation rise, so does the value of commodities
As we emerge from the pandemic and the resulting lockdowns, the economic picture is changing. Government stimulus, low interest rates, and several billion pounds in savings, which piled up while we couldn’t go out in the world, means we can expect growth and inflation to continue to rise.
This will reverse market conditions that we have become used to in recent years and put the cyclical companies that dominate the UK market in a better position.
Financial experts believe the UK currently presents many opportunities, most of which we haven’t seen over the past five years. Positive highlights include:
- UK companies are positioned well to benefit from economic recovery
- Strong consumer rebound
- Unemployment hasn’t risen to the high levels expected
- Savings rate is 50% higher than expected.
By global standards, the UK market is a little strange in having such heavy weightings to banks, mining, and oil companies, but it’s these company stocks that financiers predict are likely to do well in the coming months and years.
Accumulated savings add more potential for growth
When exiting a recession, more people are usually in debt. This means that often households are focused on repaying that debt or rebuilding their savings pot.
However, thanks to the enforced and extended lockdowns, savings are already high in the UK, and debt levels are lower. This means we are more likely to see higher spending and faster growth than would be typical in previous economic recoveries.
Relative to the rest of the world, UK equities are well-positioned
The UK stock market on a relative basis is still 30% cheaper than other developed stock markets. The make up of the UK market means it is well positioned to benefit from the economic recovery. Because the UK market has some catching up to do, this presents a great opportunity for investors.
Further to this, the pandemic forced many UK listed companies to change their dividend policies. This has resulted in them being stronger than they might otherwise have been.
And management teams in businesses like housebuilding and mining have learnt from the financial crisis too. In the past, they might have attempted to expand too quickly when the cycle appeared to be in their favour, but they tend now to be better managed and less cyclical.
Banks are also in a unique position since, in previous recessions, banks would have been left in a poor state with more debts unpaid and far fewer savings.
But the UK risks being left behind in the world of technology
Some financiers fear the UK market is struggling against an image of being full of businesses failing to keep up with the changing world of technology.
Some FTSE 100 stocks suffer from this problem. However, mid- and small-cap markets contain plenty of companies that are growing. Often, these businesses have a low profile since they tend not to be household names or consumer-facing.
We saw a spate of mergers and acquisitions of these small- and mid-cap companies earlier this year, which shows that the wider world is starting to see value in this part of the market.
Because international investors often group small- and mid-cap stocks with large-cap stock, this presents further opportunities as the world continues to emerge from the pandemic.
Support British growth but maintain a diverse investment portfolio
If you are keen to invest your money and support British companies, there are opportunities to grow your wealth. However, it’s important to be selective about the areas of the UK market you invest in, as well as the underlying companies.
There are many elements that will make a difference to your investment portfolio performance.
Typically, your money has more potential to give better returns over the long term with a diverse approach. Rather than investing only in British shares, we recommend portfolios that include companies that give your money exposure to different geographic regions, sectors, and themes.
Get in touch
Our team of experienced investment managers will help you look after your wealth through an investment portfolio that is designed to meet your individual needs and tolerance for risk.
Email firstname.lastname@example.org or call 0203 617 9206.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Bowmore Asset Management Ltd is authorised and regulated by the FCA