Upbeat on the UK

When I read articles this morning from two independent investment commentators making positive assessments of the UK stock market I had to take note. For those of you who follow the figures the FTSE 100 has recently posted a new record closing high and is threatening to hit 8,000. So what is going here? Russ Mould, Investment Director at AJ Bell cites four factors that are driving returns:

1. The FTSE 100 index has underperformed its global market peers in 2016 and 2017 and is attracting contrarian investors with a bullish outlook. Brexit uncertainty has undoubtedly been a key factor in creating poor sentiment.

2. The UK is an unloved and undervalued market. It is not expensive compared to its international peers and relative to its historical earnings.

3. The dividend yield is above 4% p.a. attractive to income investors.

4. A weak pound has boosted the overseas earnings of UK companies and makes the UK a more attractive place to invest.

I would also add a rising oil price has boosted the commodities heavy FTSE 100 index specifically the oil majors. For example Royal Dutch Shell B shares have risen 29% in the two months from 19/3/18 to 21/5/18. This is highly significant as Shell and BP are the 1st and 3rd biggest constituents of the FTSE 100 by market capitalisation, so when their share prices motor the index puts on the after burners.

Coming at the UK market from a broader economic perspective Neil Woodford is similarly upbeat. He argues that economic fundamentals are improving and the consensus view has been too pessimistic. Woodford is a contrarian by nature, so cynics might claim, “he would say that wouldn’t he!” Woodford cites multiple factors including higher employment, less inflation, wage growth, better public finances and a recovery in manufacturing and exports. In addition he argues that valuations are very attractive in out of favour domestically focused companies. For example he considers housebuilders and retailers are far too cheap and growth expectations are too low. He predicts a recovery in 2018 and has positioned his portfolios accordingly.

From my perspective I am minded to agree although I remain very bearish on UK retailers. In addition I have had a long term bias to smaller companies in the UK and elsewhere and instinctively prefer additional allocation to them rather than to FTSE 100 companies, certainly for UK domestic exposure.

The content of this blog is my own understanding of the UK economy and stock market. My comments are intended as general commentary only. Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.