William Lough’s outlook: UK equities have been out-of-fashion but are well suited to the current environment
There is a sense of déja-vu about aspects of the outlook as the calendar flips from 2021 to 2022, not least that the emergence of a new Covid variant, Omicron, and the resultant ‘lockdown without locking down’ has once again created disruption in the leisure and services industries. We think this produces longer-term investment opportunities in the stronger businesses with this exposure, but equally we would have said the same thing 12 months ago! The other theme of 2021 that looks likely to be extended because of Omicron, is higher inflation prints due to supply-chain disruption, which increases the probability of 2022 being the first year of broad-based global interest rate rises since 2018. Given this is happening with global equity markets having travelled a long way over the last roughly 18 months, investors should be wary of expecting a repeat of 2021’s very strong returns from the global benchmark.
“I see the chance of a proper investment boom – the first for many years – as reasonably high.”
UK equities have been out-of-fashion but are well suited for the current environment, with low starting valuations – extreme discounts relative to the global benchmarks – and a range of strong, cash generating companies that hook into an environment of solid nominal growth and can protect against the risk of inflation spikes in the short (or longer) term. As ever, our philosophy and process lead us to companies and industries where today’s valuations don’t accurately reflect the outlook. In several cases within the portfolio, such as Essentra or UK domestic banks, we believe this is above all due to a backwards looking period of share price underperformance, which can cause investors to dismiss or not put enough weight on clear evidence that business fundamentals are improving. Finally, we see the chance of a proper investment boom – the first for many years – as reasonably high. The policy mix of strong fiscal and monetary policy which is very supportive (but gradually getting less so) provides ideal conditions, and many companies underinvested during the ‘lower-for-longer’ 2010s and are running at full capacity. The highest probability of an enduring boom relates to decarbonisation enablers, to which we have exposure via holdings such as Weir.
The information in this article has been prepared and issued by River and Mercantile Asset Management LLP (trading as “River and Mercantile” and “River and Mercantile Asset Management”) registered in England and Wales under Company No. OC317647, with its registered office at 30 Coleman Street, London EC2R 5AL.
River and Mercantile Asset Management LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 453087) and is registered with the US Securities and Exchange Commission as an Investment Adviser under the Investment Advisers Act of 1940.
This article is directed at professional clients. The information in this article should not be relied on or form the basis of any investment decision.
Please note that individual securities named in this article may be held by the Portfolio Manager or persons closely associated with them and/or other members of the Investment Team personally for their own accounts. The interests of clients are protected by operation of a conflicts of interest policy and associated systems and controls which prevent personal dealing in situations which would lead to any detriment to a client.
ES R&M UK Dynamic Fund
This fund’s unconstrained approach enables investors to have targeted exposure to what we believe to be the strongest opportunities in the UK market.
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Portfolio Manager William Lough discusses how the current opportunity is shaping his portfolio. September 2022.Learn more