A sense of optimism for 2024 is growing among UK investors, as inflation subsides and signals point to a plateau in interest rates.
That’s not only true for 1,500 polled visitors of the interactive investor website, 57% of whom are planning to up their exposure to UK stocks in 2024, but for UK managers as well, who are seeing a number of reasons to be optimistic about their domestic market.
But it’s not good tidings from everyone, as some managers are still haunted by fears of recession.
Below, Trustnet kicks off its 2024 outlooks, starting with managers’ views on the UK market.
Allianz’ Gergel: It is always darkest before dawn
There has been quite a lot of bad news priced into the UK market for a while, with the country being depicted as “the sick man of Europe”. Anything that's cyclical, small or slightly illiquid has been “hit quite hard”, and UK GDP growth remains “anaemic”, according to Simon Gergel, manager of the FE fundinfo five crown-rated Merchants Trust.
But Britain’s bad reputation is “unjustified”, as growth has been revised significantly upwards and is now line with the rest of Europe’s, while inflation expectations are also coming down. The “massive” market de-rating was “not fair” and things can only get better from here, according to the manager.
“The spread in valuations between highly and lowly rated companies is the widest it’s ever been since the TMT bubble in 1999-2000, which will generate a lot of opportunities for stock pickers to buy companies at attractive prices in 2024,” he said.
“In particular, when we look at stocks, we're finding better value in the medium size area at the moment, with great companies that we can buy at really attractive valuations.”
Things should also improve as and when the market re-rates, which might happen soon because everyone who wanted to disinvest has already done so.
Finally, another advantage of the UK stock market is that over two thirds of its companies’ profits come from abroad, “so by buying UK equities, investors are actually getting exposure to the world market, and therefore they shouldn’t focus too much on the domestic outlook”.
Liontrust’s Cross: 2024 will be the catalyst
A similar view came from FE fundinfo Alpha Manager Anthony Cross of the Liontrust Economic Advantage team, who also lamented the “continued disconnect” between the FTSE 100 and FTSE 250 companies, the “consistent” flows out of UK equity funds and the “considerable” selling pressure they created, generating “overly compressed” valuations.
This might offer “considerable upside” when the right catalysts for a rebound emerge. “We believe 2024 may see such catalysts,” he said.
“In the US and Europe, there are signs that inflation is coming down and economic indicators are softening. This could mean that interest rates may have peaked. Providing there is not a hard economic landing and interest rates start to fall, the attractions of equities will increase.”
Fidelity’s Wright: UK underperformance ended with the pandemic
For Alpha Manager Alex Wright, who runs the Fidelity Special Values trust, the catalyst for UK outperformance was already here and no one took notice.
Everyone is aware that the UK market has been underperforming, starting with the Brexit referendum in 2016 and then through a painful five-year period through to 2020. But what might surprise people, according to Wright, is that that underperformance “very much bottomed out in the pandemic”.
“The market performed roughly in line with global markets in 2020 and since then, it has been outperforming. It's not as much about the question ‘What's the catalyst for the UK market to outperform?’, because we already turned the corner with most people not noticing,” he said.
“Investors still think that the US is the place to invest, particularly in index funds and into the ‘Magnificent Seven’ companies. That's where money flows are continuing to go, despite the fact that on a three year view, the UK market has done as well as the NASDAQ, in fact.”
In terms of price, Wright highlighted the “very attractive” absolute valuation proposition for the UK, in particular versus other large markets such as the US. He too preferred the smaller end of the market.
Janus Henderson’s Blackbourn: We prefer large-caps
Not everyone was unreservedly positive about the outlook for the UK, however.
Oliver Blackbourn, co-manager of the mixed-asset Janus Henderson Diversified Growth fund, found the UK market better than others, but still with many pitfalls.
“Given some of its characteristics and its low valuations, the UK is a nicer place to hide right now than somewhere else, so we are not so negative towards it as we are for some of the other markets around the world,” he said.
More interest rate cuts could potentially be beneficial to UK companies in relative terms, given that a lot of their exposure is overseas, but this is not the time to be taking too many risks. That’s why, while some managers are moving away from the FTSE 100 towards small and mid-caps, he still preferred the safety of larger companies.
“The small-cap or mid-cap space is much more challenged at the moment. We already have weak growth in the UK, and further pressure will be coming through from past interest rate rises and will impact consumer spending, among other things. Also, any rise in the unemployment rate tends to be associated with recession,” he said.
“The larger companies, we are slightly more optimistic about. Valuations are cheap and there’s a good mix of sectors to take a more defensive exposure.”