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Why UK Equities Might Be a Contrarian Investment Winner

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Over the first three months of this year London-listed equities were the least popular of any developed market in the world with international institutional investors. The UK’s first quarter GDP growth ground to an almost halt and retail data, considered one of the most accurate reflections of future economic growth, was poor. Throw in a vulnerable looking, warring government and the uncertainty of the Brexit process and it would have been a brave soul who bought the dip that took hold at in mid-January and had knocked over 12% off the FTSE 100 by late March.

Since late March, the FTSE 100 has gained almost 13.5% to move above that January peak and set a new record high in the process. In the midst of Brexit angst, early signs of slowing global trade, trade war fears between the US and China and the EU and Italian politics threatening EU stability, the UK’s benchmark equities index has never been higher.

A natural assumption might be for investors to consider bailing out while the going is good. Record valuations amid a myriad of factors which could cause capital to take fright is usually a flashing red light that a fall is imminent. The most obvious contrarian logic would be to cash out profits and wait for the correction to come back in. However, there are also several arguments that suggest the ‘real’ contrarian move is to stay in. Some analysts argue that the FTSE 100 could, in fact, break through the 10,000 point ceiling before its current bull run comes to a conclusion.

So what are the arguments that support further gains that should be considered by those investing online in UK equities through ISAs and SIPPs? Some are global and some are localised to the UK. On a global level, Bank of America Merrill Lynch notes that while the rally that has been in place across developed market equities internationally is now the second longest since World War II, it has been comparatively shallow. The output gap between global GDP potential and current levels is, The Telegraph’s Tom Stevenson argues, is only now starting to close. BoA Merrill Lynch’s analysts believe, globally, we are still only mid-cycle. That would mean the end phase of the cycle, when gains tend to be greatest is yet to come. On that basis, investors would do well to stay invested wherever they are.

On the level of UK equities more particularly, the London Stock Exchange, and FTSE 100 in particular, has a particularly heavy weighting towards financial, energy, commodity, consumer staples and the kind of mature quality companies that typically do well as bull cycles mature. It also has higher exposure to defensive sectors than the global average. London is also light on consumer discretionary companies and real estate, which traditionally suffer most when markets turn. A currently weak sterling is another bonus with most of our big companies earning much of their revenue abroad in other currencies as is the fact many FTSE 100 companies offer an income yield of more than 5%, which can be reinvested. London-listed equities are also currently cheaper than those in the US and Europe. We’re at a similar level to Japan, currently the darling of institutional investment capital.

Additional boosts for the UK is the fact M&As and IPOs are picking up, which brings an injection of fresh capital. We’re also only just past the FTSE 100’s 1999 peak again following the Brexit correction. Capital is beginning to get nervous of the Eurozone again and London could benefit.

The current run could end abruptly but it could just as easily keep going and if 10,000 moves onto the horizon that is likely to pull more money into the market. It’s far from a bet without risk but the FTSE 100 could quite feasibly gain another 20% or more before the decade is out and the cycle turns.

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Paul

The author Paul