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Should investors be looking at the UK equity markets?

Despite the UK’s lack of sustained economic growth, experts remain fairly upbeat on the state of UK equities, writes Tanzeel Akhtar

UK shares have enjoyed a robust year with the nation’s primary markets having surged but advisers and managers alike predict a long grind lies ahead given the lack of any real sustained economic growth.

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Over the past year, the FTSE 100 and FTSE All Share indices have risen respectively by some 17.1 per cent and 18.6 per cent to 24 April.

But last week’s economic data did little to boost confidence, after it was revealed the UK narrowly missed entering a triple-dip recession as GDP expanded by a mere 0.3 per cent in the opening three months of the year.

JP Morgan Asset Management global market strategist Dan Morris says people should not focus too much on GDP growth when it comes to equity investing.

He says: “Equities are still trading at below average valuations. Though investors should be looking primarily abroad, particularly at emerging market equities, UK equities have still performed well so far this year.

”Performance is not quite as good as the MSCI USA index but valuations for UK equities are better than they are for the US. And the UK small cap index continues to outperform despite weak domestic growth.”

AWD Chase de Vere head of communications Patrick Connolly says the state of the UK equity market is not determined by the UK economy.

equity

He says: “Overseas sales probably make up 70 per cent of those from FTSE 100 companies. Some will be from Europe which looks as weak as the UK but more will be from the US and much faster growing emerging economies, however this does not mean the UK market represents incredibly good value. It does not. If you want to buy quality now you certainly have to pay for it.”

In contrast, perceived riskier sectors such as miners, banks and technology companies have been largely ignored by investors and potentially look to represent good value if sentiment improves, says Connolly.

Threadneedle head of equities Simon Brazier is upbeat on the UK’s strong corporate performance, believing it can continue in the coming months but he notes there are factors which could cause concern on the horizon.

He says: “In common with a number of other developed economies, the UK’s high level of debt is likely to constrain UK economic growth over the medium term. We forecast growth to remain muted as consumers continue to pay down debt, banks rebuild their balance sheets and the coalition Government focuses on deficit reduction.”

Brazier also highlights that allocations to UK equities by global investors are low.

He says: “Overseas managers of global equity portfolios have started to recognise the relative value argument and this has led to some modest inflows but meaningful asset allocation moves from large pools of capital such as sovereign wealth funds have not yet happened.

“With UK companies maintaining a high profile in supplying emerging governments with specialist products and expertise, and the relative weakness of sterling likely to enhance the cheapness of UK assets, this could be set to change in 2013.”

Old Mutual head of equities Ashton Bradbury believes strong company balance sheets and growing dividends are key market drivers and adds he has been positive on the UK equity market since summer 2009, with the caveat that investors need to exercise patience during phases of volatility.

Bradbury says: “We remain positive but feel we may currently be in the midst of just such a period of short-term volatility.

“Our optimism is not particularly due to the global economy, although it provides an acceptable background. In the US, growth appears likely to accelerate into the second half and the consensus forecast of 2 per cent for 2013 as a whole could well be beaten.

”The UK and Europe look worse. We expect the UK economy to remain flat, or maybe to see a little growth, with the eurozone remaining in recession.”

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