Touchbutton 91 – Top of the Charts (Taking Stock)

Sometimes stockmarkets can be deceiving, drawing you into a false sense of security and, in the case of the UK bellwether FTSE 100 Index, a distorted reflection of reality. One could be forgiven in thinking that UK plc is performing well – the UK stockmarket is going gangbusters after all. But is it? High inflation, rising interest rates, tepid economic growth, increasing social discontent and strike after strike paints a very different picture.

An index of the largest 100 UK-listed companies can be a misleading barometer of UK plc – the fact this widely quoted index has achieved an all-time high is more a reflection of skewed sector outperformance and positive translation of international earnings to a wounded sterling.

“Do not be fooled by the backdrop of ‘large-cap index momentum’.”

Do not be fooled by the backdrop of ‘large-cap index momentum’. A deeper dive into the UK stockmarket uncovers UK centric medium and small-cap indices, providing a more realistic temperature of the UK economy. Compared to their large cap cousin, medium and small-cap indices have struggled to perform as well, reflecting the UK’s challenged economic position.

“…amongst the Premier League of G7 nations, the UK is firmly in the relegation zone.”

Data released by the OECD indicates a sobering economic outlook. The UK economy is expected to contract by -0.4% in 2023, before staging a modest +0.4% expansion in 2024. In some ways this is not surprising given the UK’s poor productivity growth, where output remains below pre-pandemic levels. To put this in perspective, amongst the Premier League of G7 nations, the UK is firmly in the relegation zone.

“…opportunities often arise from periods of adversity.”

Taking stock, if history has taught us one thing, opportunities often arise from periods of adversity. Away from the UK-listed behemoths, under the surface lie UK-centric companies presenting relatively attractive valuations. Given the economic risks, timely considered allocation to this asset class is of utmost importance, but here lies a fertile environment for active management to prevail.

Looking back, 2022 was a very challenging period for active UK equity managers, given a significant divergence between large and mid/small caps. This event created attractive opportunities lower down the market cap spectrum. As we progress into 2023, it is pleasing to see our widely held mid/small cap-tilted UK funds having a very strong start to the year.

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