The FTSE 100 index has hit an all-time high on multiple occasions during 2017, so it makes sense for investors to ask whether valuations are now looking stretched and if markets are due for a substantial correction. 
Despite the performance of the UK market being strong, it is actually hard for me to think of a less popular area anywhere in the investment universe at present than UK domestic stocks.
Indeed, the latest Global Fund Manager Survey from Bank of America Merrill Lynch indicates that investor sentiment towards the UK is now as bad as it was in 2008 when much of the UK banking system was on the verge of collapse.
This appeals to my contrarian instincts and, in some ways, reminds me of how low sentiment towards emerging markets had sunk a couple of years ago.
Emerging markets have delivered very strong returns since then, illustrating that a low point in sentiment can sometimes be a great period to invest in markets.
Source: BofA Merrill Lynch Global Fund Manager Survey
Identifying potential catalysts for change
I can see three potential catalysts for a positive reappraisal of the UK market.
Signs of progress in Brexit discussions would certainly help.
Any prediction I put in writing today is likely to be out of date within weeks, if not days, but I would make two observations.
The first is how far the UK government has already moved since the unexpected general election result in June, both in terms of its much clearer desire for an extended transitional period and also for its willingness to continue making payments into the EU budget during that period. The second is that, if progress towards such a transitional agreement is going to be made, then it will need to occur in the next few months otherwise it will be of little value.
Secondly, the UK market could potentially benefit from a pickup in M&A activity, which has so far been relatively subdued despite the weakness of sterling since the Brexit referendum and what look like attractive dividend yields. In my view, this is probably due to private equity firms and overseas buyers also waiting for further clarity around Brexit before acquiring UK-based assets.
The third potential catalyst, and one that we can analyse with more precision, could come from some stabilisation and/or improvement in UK economic data. The latest employment data continued to show solid job creation in the private sector and my recent meeting with the management of Hays, a leading recruiter, added to my confidence that the private sector jobs market is getting steadily better, particularly outside London.
Inflation in the UK has been rising since late 2015, but there are a number of reasons that encourage me to think that inflationary pressures may be peaking. This trend has already being seen in the USA and Europe, both of which have seen inflation fall from its high point of several months ago.
I believe the UK is lagging behind partly due to the sharp fall in sterling last year, but it is worth noting that the pound has now rebounded from the lows of $1.20 and the sharp currency-induced price pressures will gradually drop out of the annual inflation calculation.
Wage growth remains subdued despite an apparently tight labour market: perhaps the only source of optimism here could be if the 1 per cent cap on public sector wage growth is at least partially removed.
Taking all this together, the pressure on disposable incomes has been significant, but my view is that we may soon be past the worst.
Good stock-picking remains vital
This macroeconomic analysis, combined with extremely low valuations in some areas, suggests that this should be fertile ground for contrarian investors.
Stockpicking will be vital, however, as a number of domestic companies are facing structural challenges as well as cyclical ones, be it from low-cost discounters in the case of food retailers or new online competition in a host of sectors.
However, a number of well-placed businesses have seen their share prices dragged down by the general apathy towards the UK.
A company’s ability to be resilient in the face of economic headwinds is key, and I would highlight some of the holdings in the portfolio as examples: WH Smith, Howden Joinery, Taylor Wimpey and ITV.
These companies each exhibit some of the characteristics that I look for when picking stocks, such as strong fundamentals, sound balance sheets, a strong competitive position and experienced management.
A lot of bad news already in the price
Nobody would deny that the UK faces some major challenges in the coming years, but the question for investors is: how much bad news has already been priced into the market? My view is that any outcome better than a substantial economic slowdown on a par with the global financial crisis should mean that there is currently unrecognised value in UK domestic stocks. As ever, stock picking will be the key to taking advantage, so I continue to focus my efforts on analysing individual companies, meeting with management, and building a diverse portfolio in order to capture what I view as the best opportunities in the UK stock market.
Steve Davies is fund manager of the Jupiter UK Growth fund. The views expressed above are his own and should not be taken as investment advice.