A slowing economy and inflation at a 30-year high have dominated headlines concerning the UK recently, but Daniel Casali, chief investment strategist at Tilney Asset Management, reminded investors that the UK economy was not the UK stock market, where he said there were still opportunities.
The latest GDP data revealed that the UK economy only grew by 0.1% between January and February this year and at the same time inflation hit 7%.
The Office for Budget Responsibility (OBR) now believes that CPI will peak at close to 9% in the fourth quarter of this year, which will continue to erode the purchasing power of UK consumers.
Consumers are facing a tough time as energy prices have soared alongside inflation, the former having been worsened by continuing supply and demand mismatches that were already in issue due to Covid, but that have now been accelerated by the war in Europe.
Added to this is the government’s decision to raise taxes. In the Spring Budget the chancellor announced an increase to National Insurance contributions by 1.25 percentage points, meaning that households’ disposable income is set to fall by 2.2% in the 2022/23 tax year, “the largest fall since the 1950s”, Casali said.
“This is undoubtedly a precarious moment for the UK economy”, he said, but this drab outlook did not represent the UK stock market.
“Many of the largest companies in the UK stock market draw their earnings from overseas; indeed, around two-thirds of FTSE 100 earnings are from abroad.”
He added that this means “many companies have relatively low exposure to domestic economic performance. Equally, the UK stock market continues to look cheap relative to many of its peers”.
Indeed the FTSE 100 has had a bountiful period at the start of 2022, emerging as the only major market to have made a positive return year-to-date, shown in the graph below.
The FTSE 100 is dominated by oil, mining and commodity stocks, all assets which have rallied in the wake of Russia’s invasion of the Ukraine.
Performance of major indices YTD
Source: FE Analytics
However, Casali caveated that investors should not just run in head first and any investment “does require careful navigation”.
According to Tilney’s research, the ideal sectors invest in during the current period of high inflation and medium growth were the energy, healthcare and consumer staple sectors.
Withing this, Casali recommended “seeking out companies with high and stable profit margins and pricing power, which allows them to protect those margins”.
“Helpfully, these sectors are relatively cheap and should also perform well in a weaker environment, where inflation is high and growth is low,” the investment strategist said.
He added that the investment case in the UK needs to be “handled with care” but that there were opportunities to be found, especially where companies derive most of their revenues from overseas.
“When combined with careful stock selection, it’s possible to identify companies that can thrive whatever the economic weather,” Casali added.