The UK stock market has sprung a surprise this summer. Even against the background of gloomy GDP and other economic data, the FTSE 100 index – regarded as the bellwether of our economy – has soared by 11 per cent this year to reach a record high of 9222.
The index has outpaced its US counterparts, staging a bounce back from its April ‘Liberation Day’ low of 7544 when tariff announcements sent shares tumbling. The FTSE All-Share index, which covers the top 600 companies quoted in London, has also executed a surprising recovery.
In the face of the downbeat stream of news on debt, employment, tax increases and much else, many investors have withdrawn billions from UK funds this year.
But the Footsie’s feats may be causing some of them to reassess this strategy. Britain may face challenges, but nowhere is exempt from economic and geopolitical angst at present.
As Helena Pomfret, of wealth manager Evelyn Partners, points out: ‘The heightened levels of uncertainty across the world mean it’s important to stay diversified.’
A foray into UK markets is not an insular approach. The members of the FTSE 100 earn about 80 per cent of their revenues overseas, but the FTSE 250 and FTSE 350 are more domestically focused, spreading your risk.
Bright outlook: Britain may face challenges, but nowhere is exempt from economic and geopolitical angst at present
Laith Khalaf, of broker AJ Bell, argues that UK shares – particularly those in small and medium-sized companies – are ‘pretty attractively valued just now’.
He adds: ‘When an index reaches a record high, that can be a signal for caution. But in the case of the Footsie, it’s been slow to get there.’
If you are contemplating forming a new and deeper relationship with the UK markets, here are some of the companies and funds to back.
MAKE THE MOST OF MERGER MANIA
One compelling reason to back UK PLC is the expectation that the takeover bonanza will continue. During the first six months of the year, there were £74billion-worth of bids for British businesses, driven by the view that their shares were trading at ‘an extreme discount’, as one expert put it.
Companies such as the banknote printer De La Rue have been acquired by US private equity groups. Others including Alphawave, Deliveroo, Just and Wood Gp were snapped up by ‘trade buyers’ – firms in the same industry.
Earlier this month the precision instrument maker Spectris finally succumbed to the largest US private equity player KKR at a price of 4,175p-a-share, 96 per cent above the price when predators began to circle in June.
But it is likely that some companies will rebuff approaches they regard as opportunistic.
In June, Craneware – which supplies software to US hospitals – rejected a £939m 2,650p-a-share bid from US private equity group Bain. Craneware shares stand at 2,270p. But analysts – who rate the stock a ‘buy’ – have set an average target price of 2,844p, suggesting that Craneware’s bosses may have been justified in their stand. As a result of the frenzy, more and more companies are seen as potential targets.
The list includes footwear brand Dr. Martens; Greggs, the sandwich-maker famous for its regular and vegan sausage rolls; Paragon, the bank; and Phoenix, the insurer. Such has been the gossip about a bid for oil giant BP that Shell was forced to deny that it was sizing up its rival.
BP seems vulnerable because the US activist investor Elliott is using its 5 per cent stake to agitate for cost savings. But a decent set of first-quarter results and an exploration success seem to have improved the outlook, causing Maurizio Carulli, global energy analyst at Quilter Cheviot, to remark that ‘the speculation may just end up being a blip in BP’s long and storied history’. If you’re tempted to back this great British business, analysts are targeting an average price of 450p, against the current 421p. The highest target price is 522p.
TRY TAKING A DEFENSIVE STRATEGY
Some private investors who were wary of the UK markets made an exception for defence stocks and have been richly rewarded. The FTSE All Share Aerospace and Defence index has risen by 71.9 per cent since January, driven by armaments spending uplifts in the UK, the EU and the US.
If you are venturing into this sector, there may be further upside. Since January, aircraft engine maker Rolls-Royce has soared by around 93 per cent to 1,074p.
But analysts have set a target price of 1,440p, even before the company’s vow this week to become Britain’s biggest firm through the development of small nuclear reactors to power artificial intelligence (AI) data centres.
Shares in Babcock, another major defence contractor, have advanced by 96 per cent to 995p this year. But it too continues to be seen as a ‘buy’ with an average target price of 1,153p.
If you are looking to take a stake in defence, but also want a spread of other UK companies, the top holdings of the Zeus Dynamic Opportunities fund encompass Rolls-Royce but also Chemring, another key defence group. At 535p, its shares are 65 per cent higher than in January, but analysts still consider them a ‘buy’ with a target price of 573p. Among Zeus Dynamic’s other stakes are BP and Tesco – whose shares stand at 413p, 13 per cent higher than in January. Analysts believe the supermarket has further to go, however.
Another option for exposure to Rolls-Royce and Tesco is the Ninety One UK Special Situations fund.
GO FOR GOLD AND INCOME
Going for gold has been another lucrative strategy this year. The metal’s price reached a record $3,500 in April. Gold has regained its safe-haven status and is also in demand from the central banks of nations that do not wish to hold reserves in dollars.
Fresnillo is a Mexican gold and silver miner, but the firm has been listed in London since 2008. Although its shares have soared 183 per cent this year, they are still regarded as a buy, given the forecast that gold could climb to $6,000 by the end of Trump’s presidency. But there is also a focus on Fresnillo’s dividends, another under-appreciated aspect of backing Britain – the income available at a time when deposit account rates are becoming less generous.
The FTSE All-Share’s constituents are expected to distribute about £91.3billion in dividends this year. In addition, they have already made £54bn in share buybacks, another form of returning cash to shareholders. The FTSE All-Share’s dividend yield is 3.37 per cent. This compares with 1.21 per cent for the US S&P 500.
To make the most of this mix of potential growth and income, Khalaf suggests three funds. They are: Fidelity Special Values, which seeks out unloved companies poised for a turnaround; Liontrust UK Growth, which favours mostly Footsie members; and the iShares UK Equity Index fund, a ‘cheap and cheerful’ way to take a stake in UK PLC.
Pomfret’s recommendations are: Artemis UK Select; Evenlode UK Income; and Redwheel UK Equity Income, which invests in BT, BP, Marks & Spencer, NatWest and Shell.
The share prices of renewable energy trusts were badly hit when borrowing costs surged. But there is consolidation in the sector and the dividend yields are attractive. SDCL Energy Efficiency offers a 10 per cent yield.
The hazard of investing in these trusts is considerable. But Susannah Streeter, of Hargreaves Lansdown, says they are among the long-term bets on Britain being taken by family offices that manage the money of the ultra-wealthy. Net Zero policies may be facing pushback, but they will continue to be implemented.
I have been increasing my UK bets for years – to diversify, but also to do my bit for domestic growth and entrepreneurialism.
And since Americans view our land as a great place to put their money, why would I disagree?
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