If there is a prolonged shift in sentiment towards UK equities, the likelihood is that just as the negative view dragged the valuation of all companies down, so a rally in UK equities has the potential to place many stocks, good and mediocre alike, at elevated valuations.
This creates a challenge for UK fund managers, as they seek to create portfolios without owning over-priced assets.
Alexandra Jackson, who runs the Rathbone UK Opportunities fund, says one area to avoid at present is hospitality, despite the present good news surrounding the sector, as much uncertainty remains about the scale of future demand, particularly in London.
Her view is that the valuations of many of those stocks already reflect positive news for the sector, but do not necessarily reflect the ongoing uncertainty.
With this im mind, her way of gaining exposure to the reopening of the hospitality sector is via Johnson Service Group, a supplier of linen to the hospitality sector. She says the company will benefit from the cyclical recovery, but also may grow structurally in future if the public becomes more focused on hygiene issues as a result of the pandemic.
Simon Murphy, equity fund manager at Tyndall, says one of the areas he is finding value now is in housebuilding. He says the uncertainty of Brexit and other political matters being removed, investors will once again focus on the structural positives of the sector, such as the long-term shortage of houses in the UK.
He adds that since the financial crisis, the management teams of the big UK-listed housebuilders have generally learned not to pay too high a price for land as they did in the past, and instead have built up land banks, which can be used for years to come. This provides greater certainty, and less cyclicality, than may have been the case in the past.
Alan Custis, UK equity fund manager at Lazard Asset Management, is another investor who is keen on housebuilders. He echoed Murphy’s point that housebuilders are now better managed than in the past, and adds that even with the recent share price appreciation, he does not regard them as expensive shares in the current climate.
Neil Veitch, equity fund manager at SVM, says companies listed in the UK are typically 10 per cent to 15 per cent cheaper now than comparable companies listed on other markets.
However, he adds that as the gap narrows and UK large-caps become more expensive due to the rally in cyclical assets, the prudent action for an investor would be to move into UK small and mid-cap shares, as those are less frequently bought by big global equity funds and can remain good value for longer.
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