Are you ready for the Roaring Twenties? According to the Bank of England, the UK is set for its fastest period of economic growth since the Second World War as British consumers – armed with well-stocked bank accounts – rise like phoenixes from the ashes of lockdown.
Andrew Bailey, the governor of the Bank of England, forecasts 7.25 per cent growth in the UK economy this year. That’s a huge increase from the Bank’s February forecast of five per cent, while its estimate for unemployment has fallen sharply.
But as we enter step three of the roadmap out of lockdown, how should investors respond to this abrupt change for the good in the economy’s fortunes?
Spending spree: Andrew Bailey, the governor of the Bank of England, forecasts 7.25 per cent growth in the UK economy this year
‘There are very good reasons to feel positive about the outlook for UK shares,’ says Jason Hollands, a director of wealth manager Tilney. He says the UK stock market has gone from being an ‘ugly duckling’ in 2020 to one of the world’s standout performers this year – up nearly 13 per cent.
Hollands points out that the UK’s economy and its stock market are not intrinsically linked. Not all stocks, especially in the FTSE100 Index, are domestically focused and only certain businesses are likely to benefit from renewed economic strength.
REASONS TO BE OPTIMISTIC…BUT WE’RE STILL AT 2019 LEVELS
Before we get too excited about the Bank’s cheerful economic forecast, it is important to put it into context.
While Britain’s stock market has indeed ‘bounced back’, even the Bank’s bullish forecast would not return the UK economy to the level it was at pre-coronavirus in March last year. Indeed, it will put the UK economy back where it was in 2019. Official figures last week showed that the economy shrank by 1.5 per cent in the first three months of the year – but grew 2.1 per cent in March as lockdown restrictions started to be eased.
Laith Khalaf, financial analyst at wealth manager AJ Bell, says that even though the economy is expected to remain below its pre-pandemic level until the end of the year, this will not present a problem for the stock market. ‘It’s the direction of travel that matters to markets rather than the absolute level,’ he explains.
However, he says there is still some uncertainty about the level and speed of the UK’s economic bounce back.
‘Much depends on the UK consumer,’ says Khalaf, pointing out that while some households have suffered during the pandemic, others are now sitting on huge cash piles. It remains to be seen how much of this money will be spent as people rush to shops, restaurants and hotels.
‘If consumers really let rip, the economy could be heading for a big boom,’ adds Khalaf. ‘But if they play it safe, that will moderate the recovery.’
And while those who piled into UK investment funds and UK stocks over the past six months have already done well, investment performance may not be as strong going forward.
Myron Johnson, personal finance campaigner at wealth manager Interactive Investor, says that although the UK stock market performance since November has been ‘spectacular’, it would be ‘unwise to expect that sort of stellar return to continue’.
He says that ’20 per cent exposure to the UK is plenty’ enough for most investors’ portfolios although he does believe the market still ‘has legs’.
THE SECTORS POISED TO BENEFIT IN THE RECOVERY
If you want to successfully buy into Britain’s economic bounce back, you need to pick the right sectors, the right stocks and the right time.
There has already been a ‘rotation’ in UK stock market values, with businesses that could benefit from a strong recovery such as travel, leisure and hospitality, getting a boost at the expense of technology and other sectors that did well at the beginning of the pandemic. Darius McDermott, managing director of Chelsea Financial Services, says: ‘The obvious sectors that should benefit from a strong recovery are those that have been hit hardest by Covid – travel, leisure and hospitality.
‘They should all get a boost from pent-up demand. The recent rotation from growth to these value sectors show that investors agree these areas should do better as the economy reopens.’
For those looking at individual UK stocks, there are many positioned to benefit from the bounce.
Hugh Sergeant, portfolio manager of UK and global recovery strategies at investment house River and Mercantile, likes UK banks such as Lloyds.
‘They are prime beneficiaries of both the UK economic recovery and global reflation – and they are still very lowly valued,’ he says. ‘We also like Whitbread, the owner of the Premier Inn budget hotel brand.
‘This is a classic reopening play that will show strong profits recovery in the short term and because it has a strong balance sheet will be in a position to invest to help deliver robust longer term growth.’
Laura Foll, who manages investment trust Lowlands, also likes retail stocks and banks including NatWest and Lloyds.
She is also confident about the prospects for media companies such as STV and Reach, which she says will benefit from any rebound in advertising as the economy recovers.
The banks are also a favourite of Callum Abbot, co-manager of investment trust JPMorgan Claverhouse. Despite a ‘significant rally’ from the lows of the pandemic, he says the market valuations of leading banks remain attractive.
He says a strong economic rebound will push up interest rates, leading to increased profits. He adds: ‘Banks have been part of the solution in this recent crisis and not the cause.
They have worked with the Government and the Bank of England to provide a bridge over the torrid parts of the crisis, with payment holidays and financing for struggling businesses.
‘This should foster a far better relationship with the regulator, the Government and the public than we saw after the great financial crisis of 2008.’
For the brave, travel stocks that have fallen out of favour could see a real bounceback when overseas travel opens up more widely.
Sam Dicken, a portfolio manager at financial services company IG, says that easyJet has been the worst performer stock market wise since the start of last year, down 22 per cent. In contrast, shares in Ryanair and Wizzair trade above pre-pandemic levels.
FUNDS ARE AN OPTION BUT PICK ONES WITH UK FIRMS
For those wishing to get their UK exposure from investment funds, it is important to be sure of what you are investing in.
The FTSE100 Index, for example, is not particularly UK focused compared with the index of smaller businesses, the FTSE250. Tilney’s Hollands recommends investment fund Fidelity Special Situations, adding: ‘The fund invests in UK companies of all sizes but typically has a big weighting to smaller companies. Manager Alex Wright looks for stocks that are below the radar of the wider market and are somewhat unloved but with the scope to be re-rated.’ (See Fund Focus, opposite.)
He also likes AXA Framlington UK Mid Cap fund, which focuses primarily on medium-sized companies which are typically where the more domestically focused businesses are found. Top holdings include pub chain Wetherspoons, which will fully reopen almost all of its 850 or so pubs tomorrow.
James Carthew, of research company QuotedData, likes investment trust BlackRock Throgmorton, the best smaller companies fund performer over the past five years. Dmitri Lipski, funds expert at Interactive Investor, rates fund River & Mercantile UK Recovery, but also likes commodities as a way to play the UK recovery.
‘Commodities have a cyclical nature and the current point in the market cycle might be an attractive entry opportunity,’ he says.
‘There has been an improvement in the sentiment towards commodities on the back of structural longterm trends – including economic recovery from the pandemic, inflation fears, greater infrastructure spending and a resulting higher demand for materials.’
He suggests that investors look at exchange traded fund WisdomTree Enhanced Commodity as a ‘useful and low-cost’ route into the sector.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.