Investors in the UK are currently “spoilt for choice”, according to JP Morgan’s Georgina Brittain, who says she doesn’t have space in her portfolio for all the opportunities she is currently finding.
The UK was one of the worst-hit developed markets in the coronavirus crash of last year after the FTSE All Share lost 9.82 per cent, compared with gains of 14.12 per cent from the S&P 500 and 2.13 per cent from the MSCI Europe.
Performance of indices in 2020
Source: FE Analytics
Brittain, who manages the JPMorgan Mid Cap and JPMorgan Smaller Companies investment trusts, said this was unsurprising, given the services focus of the economy. However, while this pulled the UK down in last year’s crash, she thinks it should also help it to bounce back harder.
“We are absolutely looking for and expecting a recovery this year in the UK,” she said.
“Given that almost half of our index is UK [earnings] focused, we're excited about small caps, and as we sit today we're a little under 15 per cent overweight to the UK versus our benchmark.
“In addition, it is not just the UK, our focus is on the consumer. We think the consumer is, speaking personally, raring to go. We are just desperate to get out there and start spending money. We want our lives back and we're going to spend for it, so I think you can hear we're excited.”
Despite the recovery in the market and the expected boom in spending, Brittain pointed out valuations still look reasonable. Although earnings growth of about 20 per cent is expected this year and next, P/E ratios are on average below 15 per cent.
Katen Patel, Brittain’s co-manager on the two trusts, said these figures are based on relatively conservative projections, factoring in a U-shaped recovery in the UK rather than a V-shaped one.
As a result, Brittain said one of her biggest problems is finding room in her portfolio for everything she wants to buy.
“We're spoilt for choice at the moment,” she continued. “When I say that, I really mean it. We're pretty much at our maximum gearing, so we're selling to buy because there are so many things we want to buy, but we're struggling to find things to sell.”
Brittain’s positivity is shared by William Meadon, manager of the JPMorgan Claverhouse IT. He said that the re-opening of the economy is not the only reason he is so optimistic.
The manager has argued that the UK market has looked cheap since it voted to leave the EU in 2016. However, he said it lacked the catalyst to realise that fair value – until last year.
“We had two very significant catalysts in the fourth quarter of 2020,” he explained. “Yes, the Brexit agreement on Christmas Eve, but we also had what was called Pfizer Monday on 9 November, which was a trigger for investors worldwide to have confidence in the sustainability of the recovery.
“Those two catalysts together are releasing a number of opportunities in the UK. They are making it investable for the first time since 2016. Many investors internationally have, understandably I suppose, not bothered with the UK – the currency was vulnerable. So they waited until we sorted ourselves out. And since we've had that Brexit agreement, the UK equity market is now back on investors' radars.”
There is another reason why Meadon thinks the UK could do particularly well in the recovery. The decade-long bull run that was halted by last-year’s coronavirus crash was characterised by the outperformance of growth over value. However, increased inflation expectations in response to the massive amounts of fiscal stimulus pumped into the economy have led to a sudden reappraisal of value stocks and Meadon said there is an obvious beneficiary of this trade.
“The UK, particularly the big-cap space, is the ultimate value market,” he explained. “It's full of cheap companies, which are liquid.
“The three principal ones are banks, oils and miners. All of them are on single-digit P/Es, all of them now paying dividends again, all of them are beneficiaries of an economic recovery and all of them are pretty much under-owned.
“Banks are beneficiaries from the yield curve steepening, oil stocks benefit from the oil price rallying – if you recall within the last 12 months, the oil price went negative, so oil producers were paying you to take it away because there was no storage capacity. Now WTI is at 61 bucks.
Performance of index since Jan 2020
Source: FE Analytics
“And the mining stocks, we know what's happening to commodity prices around the world, they are very strong on the back of the expected recovery.”
He added: “A lot of fund managers fell out of love with these stocks many years ago, and like other things you fall out of love with, it is very difficult behaviourally to fall back in love with them once you've switched off.
“[But] that confluence of events is really attractive and 25 per cent of the UK index is compelling to me.”
Data from FE Analytics shows JPMorgan Mid Cap has made 241.73 per cent since Brittain joined in March 2012, compared with 127.86 per cent from the FTSE 250 ex ITs index and 121.62 per cent from the IT UK All Companies sector.
Performance of trust vs sectors and index under manager
Source: FE Analytics
It is on a discount of 8.25 per cent, compared with 10.89 and 8.11 per cent from its one- and three-year averages.
The trust has ongoing charges of 0.88 per cent and had gearing of 9.7 per cent as at 31 December 2020.