Political events typically do not have a long-term impact on investment markets. The UK general election on 4 July, however, may have signalled a new period for the stock market, which we believe has long been undervalued. These new political winds, combined with cheap valuations and reasonable economic backdrop provide a positive platform for UK companies of all sizes.
Let's start with politics. Labour's large majority may herald political and policy stability for the UK. This is essential if the UK is to attract international investors to return, whether to invest in the economy or the stock market. With political uncertainty elsewhere in the world, including the elections in France and the US, the UK may actually become one of the more stable countries.
Second, the new government has stated its commitment to a pro-growth agenda and other policy reforms such as the simplification of pensions. These also have the potential to boost the economy and stock market.
There are a number of reasons why the UK has looked cheaply valued to us, which has led to the Liontrust Multi-Asset team scoring the market a 4 in the Tactical Asset Allocation process, in which 5 is the most positive and 1 the most negative.
First, as our colleagues on the Liontrust Economic Advantage team have stated, the capitalisation of the entire UK stock market is 17% below the fair equity value, according to estimates by Canaccord Genuity Quest. The opportunity is particularly pronounced among small caps, where the discount to fair value is 29%. This discount is even more pronounced when the UK market is compared to other indices such as the US.
We would argue that the spate of acquisitions of UK listed stocks by private equity and overseas companies reinforces this belief that the UK is cheap.
Second, is the outlook for the UK economy. It appears as though the economy is through the worst, with the UK having cleared the shallow recession of the second half of 2023 and inflation having returned to the Bank of England’s 2% target. The UK has some unique characteristics that pushed inflation higher than the US and much of Europe, including the country’s energy policy. These same characteristics, however, have enabled inflation to fall quicker than most other developed markets as well.
Inflation in the services sector has remained stubbornly higher than elsewhere in the economy but this is also now coming down.
Having got through the general election, the belief is that interest rates will start being reduced soon. Bloomberg stated in late June that there was a 66% chance of a rate cut in August, with the expectation it will be a 0.25% reduction.
Interest rate cuts will be supportive of stocks, especially smaller companies that have suffered disproportionately from being out of favour with investors and dealing with high borrowing costs from lenders. The Multi-Asset team has been adding to funds with good exposure to small and mid caps in the UK.
We are generally biased towards being overweight equities. In addition to the UK, we are most bullish about Japan, Asia, emerging markets and US small caps. The economic environment and outlook are positive for equities, they are still generally cheap, under-owned and there is a lot of cash waiting on the sidelines. A strengthening global economy or further improvements in investor sentiment would give a major boost to them.
It is always hard to predict when a market can realise the value identified by investors and what the catalyst might be. Typically, this does not usually require a major catalyst, and an increase in positive sentiment may be sufficient. We believe the UK is moving into just such an environment where there will be greater recognition of how the market, in particular small and mid caps, are undervalued.
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This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
