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Investing in UK stocks – the perspective of an HL fund manager

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The UK stock market has been lagging behind the rest of the world for more than a decade. But the economy is now emerging from a deep recession.

Is it time for another look at the potential of UK stocks?

There is reason to hope. Governments around the world are trying to boost their economies to help them emerge from the pandemic crisis. President Biden is pumping billions of dollars into the US economy, Chancellor Sunak is spending billions to keep the momentum going in the UK.

The UK market is very international in nature and many of our larger companies earn a large part of their income overseas. Thus, the United Kingdom should benefit from stimulus measures both at home and abroad.

This article is not personal advice. If you are not sure which course of action is right for you, ask Financial advice. Remember that the value of all investments can go up and down, so you might get back less than what you invested.

Why do UK equities now look more attractive?

Programs like the holiday have benefited banks and kept bad debts under control – even as millions of jobs have been lost.

Now, markets can sense that financial conditions may become more favorable for lenders. Since the financial crisis, banks have struggled to earn decent returns.

Ultra-low interest rates capped the difference between what they could earn by lending and the cost of attracting deposits. Bond yields have risen in recent months, suggesting better margins going forward.

Commodity prices have also risen, with oil rising above $ 60 a barrel and copper prices hitting new highs in recent months.

Back home, the street and hospitality industries have slowly reopened as best they can and the British are flocking to pubs, shops and restaurants. The consumer has long been a key driver of the UK economy and the news is getting better and better here.

Retail sales in April rebounded much stronger than analysts expected, with buyers again flocking to Main Street. Clothing sales have jumped by more than two-thirds from March, and brick-and-mortar retailers have recovered sales from online retailers.

Consumer-oriented sectors account for around a quarter of the UK market value. This is a big slice that should see an improvement in underlying trading. The question is, will this cause stock prices to rise or are better times already reflected in company valuations?

Cutting costs could help increase profits

The closures have shut down many industries. And others who could continue to trade have seen their incomes drop dramatically.

Reducing costs has become necessary after a decade of economic growth that has seen some companies gain some weight.

One trend we’ve seen since the pandemic is that businesses are investing to build their digital strengths. The introduction of technology to automate processes reduces costs and waste, often helping companies improve their environmental profile.

My take on how technology improves businesses

Lighter companies, seeing their sales recover, should be able to capture more of that income in the form of profit.

We could be at the start of a period of very strong earnings growth as the economic recovery is amplified by these structurally improved margins.

The UK will not be the only one to benefit, just as it was not the only one to suffer the impacts of the pandemic. But the UK market’s exposure to commodities, banking and consumer spending is higher than that of many other countries.

Part of the reason is that the UK is relatively underexposed to some other sectors.

Information technology companies represent only 2% of the market’s value and medical technology stocks are scarce in the UK.

Decades of takeovers have also left the UK market with relatively few industrial stocks. When I started my career in the 1980s, industries like engineering, building materials, and chemicals were big industries. Now you need a magnifying glass to find some of them.

Now is the time to invest in the UK?

Part of the reason the UK has been out of favor for so long was the heavy exposure to the same sectors that are currently on the rise.

It should be remembered that the producers of raw materials cannot control the prices at which they sell. And banks are under attack from FinTech start-ups trying to steal their lunch. Consumer-oriented businesses are welcoming their customers again. But after the novelty of returning to stores, cinemas and restaurants wears off, the trend to spend more online may reaffirm.

That said, large parts of the market are still poised to profit from a recovery and improving credit conditions for banks, so now might be a good time to think about investing in UK stocks.

How we research UK stocks

Our philosophy in the choice of actions for the HL Select Fund is to try to find companies with strong competitive moats, operating in industries that have the potential to offer predictable long-term growth.

The UK economy is quite cyclical – some companies move in and out of favor depending on the health of the economy. So many holdings of our UK funds earn most of their money overseas. And we are also looking for digital winners in each industry so that we can diversify where our investors’ money is held.

Learn more about each fund and how they are invested.

Find out more about HL Select UK growth stocks

Learn more about HL Select UK Income Shares

Steve Clayton is a fund manager at HL Select range of funds.

HL Select funds are managed by our sister company HL Fund Managers Ltd.

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