BRITISH stocks are likely to outperform in the next few years — especially in the small and mid-cap sector — even though the UK is likely to be one of the first major economies to start tightening fiscal and monetary policy.
As major developed nations emerge from Covid restrictions — and spending and inflation picks up — domestic focused companies on the UK bourse are likely to outperform, says Clive Beagles, senior fund manager at Pendal Group’s UK based asset manager J O Hambro.
“You get more of the domestic stocks in the mid and small cap part of the market,” he explains.
“Valuations in that part of the market are undemanding and it feels like there’s an awful lot of internally generated momentum.
“On top of that, the UK market is undervalued more generally, and we expect the currency to firm particularly if Britain is going to be early in the tapering cycle.
“And there’s still quite a healthy pipeline of mergers and acquisitions.
All of these things mean the UK should outperform. It has been doing so already … but more by stealth. And I expect it to keep doing so.”
Watching what happens on London’s FTSE is more than trying to pick winners. It’s also a guide for other markets.
The United Kingdom led global markets — including Australia — into the COVID pandemic with high infection rates.
It’s also coming out first, with the economy broadly re-opened. As Australian states push to hit vaccination targets, thereby allowing reopening of economies, the UK is several months ahead, with two-thirds of the British population now fully vaccinated.
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While the Australian economy came to a suddering halt this quarter, the UK is expanding quickly — so quickly that the government has introduced tax hikes.
“By announcing an increase in the national insurance contribution, the UK became the first Western government to start shifting towards balancing the books,” Beagles says.
And the Bank of England is sounding more hawkish.
In its most recent monetary policy summary last month, the central bank said while inflationary forces were most likely transitory, the economy “is projected to experience a more pronounced period of above-inflation in the near term”.
It’s not surprising that the government and central bank want to make fiscal and monetary policy “less loose” given real economic growth is expected to be around 7 per cent over the next couple of years, Beagle says.
“That has to impact how policy makers are thinking. We’ve had input inflation and now we’ve got a really tight labour market that that will feed into wage inflation. That will be stickier and harder to reduce.”
But Beagles is not concerned that any tightening of policy will dramatically hit the British equity market in the next couple of years.
“Consumer spending makes up quite a large proportion of the UK economy … because it is a mature economy and a services economy. In that regard, the level of employment and the taxes that generates will be more important than whether the marginal tax rate has gone up a per cent tor two.”
Also, the government has put in place incentives for businesses over the next two years.
“We definitely expect to see business investment picking up,” Beagle says. “Those two things together mean you’re looking at strong real GDP growth. And that should support the market for the next couple of years.”
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