This year, the approach of Valentine’s Day has coincided with the reassessment of one particular relationship. The British have been out of love with UK shares for a while.
But views seem to be changing, amid a shift in expectations about the outlook.
In light of this, it is worth asking whether your portfolio needs closer ties to UK plc.
The International Monetary Fund (IMF) is ultra-pessimistic. But the think-tank National Institute of Economic and Social Research (NIESR) contends that while many households will struggle, the UK could swerve a recession this year, having – narrowly – dodged one in 2022.
As the brokers Stifel put it: ‘The gloomsters may be disappointed.’
The signs of improvement in sentiment include the 5 per cent rise since the start of the year in the domestically focused FTSE 250 index, home to the likes of EasyJet, Greggs, ITV and Marks & Spencer. In 2022, this index was hit by political turmoil, at home and abroad.
This week, the FTSE 100, which encompasses businesses like AstraZeneca, BP, HSBC, Shell and Unilever, reached another record high.
About 82 per cent of the post-tax profits of this index’s constituents come from overseas. Yet the Footsie’s fortunes still reflect opinion about Britain’s prospects, and there is a growing perception that the index can be considered cheap since it is trading on a P/E ratio of 11, against 19.5 for the US S&P 500. The P/E ratio is a rough measure of value.
Uzo Ekwue, equities research analyst at Schroders, comments: ‘The UK market continues to trade at a lower valuation to many of the international indices – which makes it a compelling opportunity in our view. Shares in small and mid-cap companies fell too heavily, and are well placed to benefit from recovery.
‘We think the FTSE 100 is set to do well too.
‘Companies have high levels of cash on the balance sheet and high free-cash-flow yields – which should underpin a continuation of share buybacks – and dividends.’
Investors who have failed to see the attraction of UK shares in recent years may now be wondering why anxiety about higher interest rates seems to be receding. This may be because the Bank of England is aware of the risks of pushing rates up too far, according to Huw Pill, its chief economist. In the US, by contrast, rates may need to be raised further and faster. Some of the negativity surrounding the Footsie stems from its lack of high-tech names, with a few observers even declaring the index to be ‘irrelevant’.
But it is possible to see this as a virtue, given the damaging impact of surging interest rates on Amazon, Alphabet and the rest.
Alexandra Jackson, manager of the Rathbone UK Opportunities fund, comments: ‘The UK economy is not in great shape.
‘But there are a few more tailwinds. For example, US consumers have continued to spend freely, whereas their UK counterparts are only starting to feel more robust. They’ve not been running down their billions in lockdown savings.
‘Many mortgage borrowers face increased repayments.
‘But the cost of some fixed-rate deals is now below 4 per cent, their level before last year’s mini-Budget.
Jackson has been acquiring stakes in companies that ought to benefit from the willingness of households in easier circumstances to splash out on everything from trainers to travel. JD Sports, the sports fashion retailer, has a ‘triple double’ strategy, aiming for double-digit revenue growth, double-digit market share, and a double-digit operating margin.
Meanwhile, WH Smith is prospering from the holiday-making boom, thanks to its stores at airports. SSP Group, which operates Ritazza, Upper Crust and other cafes in airports in Britain, is also catering for North American travellers who want something more than a mass-market burger while awaiting their flights.
Chemicals company Croda International specialises in the manufacture of eco-conscious ingredients used in the growing number of luxury beauty and skincare brands. Homeowners seeking to improve rather than move may opt to refurbish their kitchens with the products of Howden, the joinery business. Out of a desire to back UK plc, I have been putting some cash into UK funds and trusts, such as Rathbone UK Opportunities and Murray Income, and also into index funds and ETFs (Exchange Traded Funds).
A pile of challenges face our economy such as an ageing demographic, labour shortages and low productivity – issues that should not be forgotten amid the debate over whether the Footsie will reach 8,250 by Christmas, or even before.
But, mindful of these obstacles, I am looking to add to my exposure. The UK best buys from Bestinvest and Interactive Investor include Artemis Income, the City of London trust, Lindsell Train UK Equity, Liontrust UK Growth and Ninety One Alpha.
Also on their lists are the Henderson Smaller Companies and Mercantile trusts which own medium-sized and smaller companies. The share prices of both trusts stand at a discount to the value of their net assets.
A bargain buy bet on Britain? You could say that.