Investing in the UK (Q3 2017)

Mike Bell consider trends and opportunities for investors in the UK using Guide to the Markets charts.

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Sep 14, 2017
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The referendum result has created great political and economic uncertainty for the UK. The outcome of the negotiations with the European Union will have a large effect on the future of the UK, the value of the pound and the relative performance of different sectors.

Domestic vs international exposure, large vs small?

  • The large cap FTSE100 gets most of its revenues from abroad whereas the mid cap FTSE250 has a larger exposure to the domestic UK economy. Therefore a fall in the pound should favour internationally exposed large cap stocks whereas a rise in the pound should favour smaller more domestically focused stocks.
  • After many years of outperformance mid-cap stocks look somewhat expensive relative to large cap stocks.
  • The average UK equity fund has far more exposure to mid and small cap stocks than the FTSE All Share.

Guide to the Markets - UK, page 43

Attractive income and commodity exposure

  • In a world where income is still hard to come by, UK equities offer a very attractive dividend yield relative to other equity markets.
  • Earnings expectations for UK-listed companies collapsed for five years, driven mainly by the fall in commodity prices. As commodity prices have recovered from their lows, earnings expectations have improved.
  • UK equities stand to benefit more than most other developed markets from any further improvement in commodity prices.

Guide to the Markets - UK, page 42

UK valuations are relatively attractive

  • UK equities are neither cheap nor expensive relative to their historical average price-to-earnings (P/E) ratio, but relative to government bonds, the dividend yield available on UK equities looks attractive.
  • UK earnings have plenty of room for recovery after their poor performance in recent years. As a result, the cyclically-adjusted P/E, which takes into account the position in the earnings cycle, leaves UK equities looking very cheap relative to their long-term average.

Guide to the Markets - UK, page 44

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Investment implications

  • Weaker sterling, combined with undemanding cyclically adjusted valuations and a high dividend yield, could provide support for UK equities.
  • Large-cap equities are less exposed to potential domestic economic weakness than mid- and small-cap companies.
  • That said, the uncertainty created by the Brexit negotiations argues for taking relatively small active sector and size bets relative to the benchmark.

  

Read more about J.P. Morgan Asset Management’s UK equity fund range >

  

For Professional Clients only – not for retail use or distribution. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. The companies/securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. J.P. Morgan Asset Management may or may not hold positions on behalf of its clients in any or all of the aforementioned securities. This material does not contain sufficient information to support an investment decision and investors should ensure that they obtain all available relevant information, including fund specific risk warnings, before making any investment. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Issued by JPMorgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority, Registered in England No. 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP. 02b31c60-45d6-11e7-a23f-005056960c63

Go to the profile of Mike Bell

Mike Bell

Market Strategist, J.P. Morgan Asset Management

Michael Bell is a global market strategist within J.P. Morgan Asset Management's Global Market Insights Strategy Team. He is responsible for communicating the latest market and economic views in the UK and around Europe.

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