Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The UK: a market much maligned and oft dismissed. It’s been no fun investing in our home market in recent years. A tough decade was recently topped off by a grim 2020 which saw the FTSE 100 index of top UK shares suffer its worst decline since 2008.

Yet there’s a growing sense among investors that the UK is finally about to turn a corner.

A steadily rising pound, buoyed by positive news on the vaccine front and a Brexit deal, suggests investor sentiment is starting to turn. Andy Haldane, chief economist at the Bank of England, has been positive of late, saying he expects the UK economy to begin to recover “at a rate of knots” from the second quarter this year.

Optimism doesn’t quite abound, but there’s certainly a very British sense of curiosity. Investors are starting to detect signs of life, and many are now planning how they might best play a UK recovery.

Over the next few weeks, I’ll look at the different ways that recovery could pan out and how you can prepare for it.

But first, what exactly is generating the hype around this once most downbeat of markets?

Dropping the baggage

A big factor is Brexit. Markets hate uncertainty, and that’s exactly what Brexit has brought to the UK over the last four years. A deal, of any form, was always going to dispel some of the fog that lingered over our shores.

Hopes for a successful Coronavirus vaccine rollout are also playing a large part. A preponderance of “cyclical” companies, which tend to do better when the economy is healthy (think leisure, airlines, media, and so on), meant the UK struggled when the virus hit. It’s these companies, however, that should bounce back most in the event of a recovery. We’re also underweight the sort of long duration, “growth” stocks that did well last year but could suffer if inflation returns (more on this next week).

All the while, the UK has started looking very cheap - it’s cheaper now relative to global shares than it has been in at least 25 years. Credit Suisse estimates UK shares could be as much as 31% undervalued today. That alone makes them attractive.

Know what you’re buying

If you’re willing to take a punt on this underdog market, the case for investing is clear. How exactly to go about that is open to debate.

For most people, the FTSE 100 index of the UK’s largest companies is a good starter. It features our best-known brands, its performance is mirrored by a number of popular tracker funds, and there’s plenty of commentary on each of its constituents to be found online. It’s also home to most of the UK’s big dividend payers, making it attractive to income-hungry investors who have recently found their yields squeezed.

But investing in the FTSE 100 comes with its own caveats, one of which is the index’s international feel.

According to a recent survey, around three quarters of the earnings of the UK’s top 100 listed companies come from overseas. Moreover, around two fifths of British companies now pay their dividends in dollars.

While dollar exposure was a good thing at the start of 2020, when investors flooded into the ‘safe haven’ currency to offset market volatility, the currency’s prospects since May have looked less encouraging. A combination of higher risk appetite and lower interest rates across the pond has seen investors venture elsewhere.

That may have a bearing on your UK companies. For those with substantial operations in the US, a falling dollar could see their earnings compressed, as the dollars they earn are translated back into pounds and the goods and services they provide become relatively more expensive to US consumers.

All that’s not necessarily a bad thing. In an environment of global economic recovery, the international FTSE 100 should follow a similar trajectory.

But there are certain areas where the UK could do particularly well, and even outpace other markets. That’s where individual stock picking or active fund management comes in handy. Embellishing a portfolio with some of the undervalued companies lurking lower down the cap scale, whose earnings remain entirely domestic, could expose you to the best opportunities.

What to do

No one knows exactly what’s going to happen this year. Preparing yourself for all eventualities by diversifying across the spectrum may be your best option.

Building around a core group of FTSE stalwarts while dipping into lesser-known value opportunities could offer a relatively safe way to capture a recovery.

Our Select 50 choice of favourite investments also features plenty of options to suit your objectives.

The Lazard UK Omega Fund invests predominantly in FTSE 100 companies, so offers easy access to some of the UK’s biggest names which should benefit from a recovery. A relatively concentrated portfolio means the managers take high conviction positions in stocks they’re most confident about.

Another option is the LF Majedie UK Equity Fund. This fund offers a bit of everything. Top holdings include familiar FTSE faces like Unilever, Tesco and NatWest, but its managers also maintain a dedicated allocation to smaller companies.

An alternative pick is the Threadneedle UK Mid 250 Fund. The fund invests only in mid-cap UK stocks with significant growth potential - a “goldilocks” approach going after companies that are just the right size.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. The Lazard UK Omega Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered:

Active investingFunds; UK

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