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.

England’s heroics at the Euros this past week conjured up a confidence boost along with memories of the rollercoaster of emotions endured by fans at previous tournaments. In the world of football, hope and disappointment spring eternal in almost equal measure. This was, however, fans may recall in the years to come, a time when that balance shifted in England’s favour.

Parallels might be drawn between the country’s chequered footballing past and the stuttering progress of many of Britain’s largest listed stocks in recent times. The FTSE 100 Index has lagged international markets since the Brexit vote of five years ago, an event that left a fog of uncertainty swirling around the country’s future trading relationship with Europe.

The UK’s recent lacklustre performance at a time of great success for the US has seen the long-term gap in returns between the stock markets of the two countries widen further. Since 1994, US stocks have generated gross annual returns of approximately 11%, almost double the 6% produced by their UK counterparts1. Please remember past performance is not a reliable indicator of future returns.

Added to that has been the UK’s diminishing share of world markets – about 4% as of the end of last month – the relatively defensive makeup of the stock market and a dearth of groundbreaking technology companies to get behind. The UK was fast becoming an easy market for international investors to disregard.

None

Since the pandemic, there have been growing signs this has begun to change. So far this year, the stock market has more or less kept pace with global equities2. International buyers of UK Plc have arrived in some force albeit, in some cases, in the controversial form of private equity firms.

Most recently, a takeover of the infrastructure investor John Laing and talk of rival bids for Morrisons have helped shine a light on the international attractiveness of UK assets. One of the biggest names in private equity – the US buyout firm KKR – has reportedly established a new team dedicated to sourcing UK takeover deals.

Perhaps we shouldn’t be too surprised. With the coronavirus expected to retreat further this year and as the UK and world economies regain further lost ground, the risks associated with buying into one of the developed world’s least expensive equity markets have fallen. A strengthening pound will have helped too.

In its latest update, the OECD says it now expects UK economic growth to better the global expansion, forecasting a 7.2% increase in the size of Britain’s economy this year compared with 5.8% for the world’s major economies in aggregate3. This would reverse Britain’s position during the pandemic, during which the economy suffered one of the developed world’s most severe downturns.

Despite this, UK equities continue to trade at a sizeable (approximately 35%) discount to world equities in terms of the amounts companies are expected to earn over the next 12 months4.

This would suggest a certain amount of Brexit-inspired reticence persists, which could continue to be the case until the UK’s trading relationship with the EU has been fully bedded in. Clearly, filling posts formerly held by European migrant workers and process and delivery delays are challenges still to be fully met.

As a force in world markets, the reopening trade may be close to running its course. Markets have a strong tendency to discount events in advance of them happening, so the next big driver of equities could be expectations of a period of slower but self-sustaining growth in the winter, as the stimuli of furlough payments and big spending on Covid prevention measures come to an end.

The UK’s consumer –centric economy seems well prepared for this shift, with copious excess personal savings built up during the crisis. Latest data show the UK savings ratio – the disposable income of households that has been saved – running at 20% in the first quarter of this year, not far short of the record 26% figure reached in the second quarter of 20205.

On paper, this environment should see a gradual market shift away from deeply economically sensitive stocks like miners and industrials towards more defensive growth businesses in sectors such as food & beverages and consumer products.

However, as recent rallies among technology stocks have shown, constraining an investing strategy to one style or another can be risky when the nature of the post-pandemic world has yet to be precisely defined. Maintaining a diverse exposure to the market seems sensible.

Whether the stock market can actually take its cue from English footballing prowess remains to be seen. International concerns about bitcoin volatility, inflation and the sustainability of a strong recovery in China dominated most markets towards the end of last week. Closer to home, fears the ending of social distancing could heighten the current wave of Covid infections may also have weighed on sentiment.

Even so, with Brexit uncertainty likely to fade further this year, a still strong position in the race to vaccinate, very strong economic growth this year and the growing participation of foreign investors, the UK stock market appears to be well positioned to enjoy a positive rerating in relation to its global peers.

Fidelity’s Select 50 list of favourite funds contains two UK funds with contrasting strategies, both aiming for long term capital growth. The first of these, the Fidelity Special Situations Fund, is a long established value oriented fund. It seeks to invest in unfashionable areas of the stock market, with a focus on companies undergoing positive change.

Current large investments include the insurers Aviva and Legal & General which, among other things, stand to benefit from the government’s rebuilding agenda, owing to their investments in long-dated assets like infrastructure and the green economy.

The Fidelity UK Select Fund approaches the market differently, emphasising particularly businesses that have strong brands and robust balance sheets – “quality growth” companies, in other words. Unilever – attractively valued in relation to its US peers; Burberry, which has pricing power owing to its strong luxury brands; and Rightmove, which dominates its industry group, are among the Fund’s investments.

Both funds feature in Tom Stevenson’s five fund picks for 2021.

Finally, look out for Tom’s latest Investment Outlook report which will be published on Wednesday 14 July with a pre-recorded webcast. If you would like to ask Tom a question in advance you can do so here.

Five year performance

(%) As at 30 Jun 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
FTSE 100 23.3 0.2 7.7 -18.4 21.9
S&P 500 17.2 14.0 9.5 -7.0 56.4

Past performance is not a reliable indicator of future returns

Source: Refinitiv, total returns in local currency as at 30.6.21

Source:

1 MSCI 30.06.21
2 MSCI, 30.06.21
3 OECD, 31.05.21
4 MSCI, 30.06.21
5 ONS, 30.06.21

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. 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 Fidelity UK Select Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. The Fidelity Special Situations Fund and Fidelity UK Select Fund can invest in overseas markets, so the value of investments can be affected by changes in currency exchange rates. Both funds use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. 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 a Fidelity adviser or an authorised financial adviser of your choice.

Share this article

Latest articles

Where next for Kingfisher shares as Screwfix-owner gives update?

Can the lockdown DIY frenzy sales boom persist in a re-opened world?


Emma-Lou Montgomery

Emma-Lou Montgomery

Fidelity International

Stop worrying about a crash: the bull market has further to run

Should investors really worry about inflation, Covid and US tapering?


Tom Stevenson

Tom Stevenson

Fidelity International

Where did UK consumers spend their money in August?

The UK ventured out last month as retail sales fell


Graham Smith

Graham Smith

Investment writer