UK equity markets have been one of the worst impacted by the coronavirus pandemic and the subsequent sell-off, but investors can now look to domestic markets to provide opportunities after sharp falls in valuations, Willis Owen has said.
UK markets remain severely depressed compared to the pre-COVID peak in February, with blue chips more than 20% weaker and smaller companies around 25% lower, despite rebounding off lows.
The losses are far greater than other markets including the US, and Adrian Lowcock, head of personal investing at Willis Owen, says therein lies the opportunity for investors.
“We have seen investors flee markets globally in March as the pandemic hit home, and then return in April as the unprecedented levels of stimulus were put forward, but the UK has continued to amble along behind other regions thus far,” Lowcock said.
“Going forward there will no doubt be further challenges for investors in UK companies, and further afield, but there will also be lots of opportunities for skilled and experienced managers to find companies adapting to the situation.”
While projections for growth in the UK – and globally – are grim for 2020, with the UK alone facing an 8.3% decline according to new figures from the European Commission, Lowcock said there will be plenty of smaller, domestically focused companies finding themselves in a strong position.
“There are still tough times ahead, and valuations could dip from here of course, but for investors valuations across smaller companies in particular already reflect this. What they are not pricing in is any future growth domestically, but clearly there will be firms able to grow and thrive as we move through this crisis.”
Lowcock said the key is to find the fund managers who are buying those companies well poised to benefit as growth returns in the UK.
“It could be easier for investors to dismiss the UK as a region to focus on now because of coronavirus and the ongoing spectre of Brexit, but as ever, there are many innovative businesses in this country that will thrive.
“The top UK equity managers have proven time and time again they can find these gems in the marketplace, and we expect coronavirus, while no doubt an extreme event, will not prevent them from doing so again.”
Below Lowcock lists his three top picks to back a domestic recovery in the UK.
TB Amati UK Smaller Companies – Manager Paul Jordan founded Amati in 2010 and the group focuses on smaller companies and VCTs. As a result, the managers have knowledge of the newest and smallest companies listing on AIM as part of their VCT work. The smaller companies fund is complemented by exposure to FTSE 250 companies to reduce risk. Fund performance is driven by stock selection, a result of the detailed and extensive research conducted by the team.
Franklin UK Mid Cap – Richard Bullas who has worked closely on the fund for a number of years is set to take over management later this year. He will continue with the same investment philosophy. The focus is entirely on the FTSE 250 and he assesses companies on three primary pillars: Business Risk, management risk and balance sheet risk. The process has delivered consistently and been successful over the long term, while the fund also invests with a quality style, which limits investors’ exposure to risk.
Merian UK Smaller Companies – Merian have one of the most highly regarded small and mid-cap teams, headed by Dan Nickols who is the manager of this fund. Companies must demonstrate at least one of these characteristics: the ability to grow earnings faster than the market average for an extended period of time; the scope to generate a positive surprise or the potential to be re-rated relative to the market. A pragmatic approach is taken to valuation, with various ratios and timescales used depending upon the opportunity. This flexible approach allows growth, value and recovery companies to be considered although the portfolio has tended to have a tilt to growth. The sector has had a difficult period since the EU referendum but we believe this fund is well placed to benefit if small caps return to favour.
Adrian Lowcock, Chris Tuite
Head of personal investing Director & Head of Consumer Finance
Willis Owen MRM London
07849 846387 020 3326 9925
Notes to Editors
Willis Owen is one of the UK’s leading online investment service providers. Founded more than 20 years ago Willis Owen now has around £1bn of funds under management and has acted as an intermediary for over 150,000 customers and hundreds of millions of pounds worth of investments,
Willis Owen Limited is authorised and regulated by the Financial Conduct Authority.