On 19 July, named by some as ‘Freedom Day’, all Covid-19 restrictions officially end in England. Five fund managers tell us what this will mean for the UK economy, and which industries will be the biggest winners.
Emma Mogford, Fund manager of the Premier Miton Monthly Income Fund, Premier Miton
“The UK economy is about to get a significant boost from the final stage of unlocking. Beyond the obvious beneficiaries in the travel and leisure sectors, the banking sector will get a helpful boost as we reach for our credit cards to book flights, hotels and theatre tickets. Credit card balances have been paid down to record low levels as consumers have built up savings during the pandemic.
“With a relaxation of the COVID rules and an increase in consumer confidence, I expect consumers to start using debt again to fund large purchases. A pickup in growth in credit cards and auto loans will provide a helpful boost to bank profitability. UK banks, such as Barclays, look cheap relative to their global peers which means their share price could rise significantly if they can deliver a positive surprise on profits.
“Now that the UK bank regulator has removed restrictions on dividend payments, I expect significant dividend and buyback announcements at the end of July as UK banks return substantial surplus capital to shareholders.”
Roland Arnold, manager of the UK Special Situations and UK Smaller Companies funds, BlackRock
“Unlocking England on 19 July is another step towards normalisation of economic activity. But ultimately it is an event which the stock market will already have discounted and, as such, has no impact on our views or outlook. Much more important is the continued vaccine roll out and further evidence the historic correlations between virus count and hospitalisations have been broken. While no doubt beneficial for the earnings of domestic stocks, the valuations are in many cases already ahead of this reality.
“We continue to believe the ever changing environment plays into the hands of dynamic smaller companies, those able to rapidly shift their business models to capitalise on new structural trends, over the often slower to move larger companies where corporate inertia is much more prevalent.”
Alan Custis, head of UK equities, Lazard Asset Management
“We believe the reopening trade amongst early beneficiaries, like retail and hospitality, has largely run its course. Sustaining such high growth may now be a challenge as support measures roll off.
“What is now more interesting for us are the underappreciated UK beneficiaries of the pandemic. The financial system has, perversely, been given a shot in the arm by Covid-19: banks unable to pay dividends have built up capital, and now have regulatory approval to distribute it. UK banks trade on 50% of tangible book value while targeting a double-digit return on equity, and we think their prospects look stronger now than any time since 2008.
“Elsewhere, although called ‘a sunset industry’ by many investors, the major oil companies are rapidly deleveraging as oil hovers around $75 per barrel. This allows them to invest for the future in green technologies and return significant capital to shareholders.
“With these sectors, we now see clear reasons to be constructive, and given they comprise some 15% of the FTSE All-Share, we think it paints a positive picture for UK equities as a whole.”
Hussain Mehdi, Macro & Investment Strategist, HSBC Asset Management
“The UK economy is expected to have another stronger quarter of catch-up growth in Q3 aided by an ongoing release of pent-up demand and a further relaxation of Covid restrictions. Full year GDP growth for 2021 could be the highest in the G7 at around 7% to 8%, with upside risks coming from a faster-than-expected labour market recovery and a quicker rundown of savings. The UK’s successful vaccination programme also limits the risk of another economically damaging lockdown.
“UK equities have also had a good run so far in 2021. This constrains the potential for further strong gains especially as economic growth is expected to cool later this year as GDP returns to pre-Covid levels. Nevertheless, the UK market can still outperform other regions given its exposure to the value factor, which we continue to favour in the current environment of global economic recovery and accommodative policy. Sector-wise, UK banks look attractive in the context of a robust economic recovery, the potential for higher UK interest rates next year amid upside inflation risks, and the end of dividend limits.”
Adrian Gosden, Investment Director, UK Equities, GAM
“Once the market tried to understand the impacts of the pandemic, it soon realised that sectors such as construction, industrial and chemicals would recover first - confirmed by shares in these areas doubling over a six- to eight-month period. Shares in hospitality, travel and leisure also rose initially but the reality has been much more complex with the Delta variant of the virus forcing ‘Freedom-day’ to be delayed, with talk of another lockdown in September.
“From here, I would try and be more focused in the shares to own. I would own domestic travel such as National Express, expected to make 32p of eps in two years’ time, but only trading at 247p, hence a PE of under 8x. In student accommodation, GCP student living has been bid for at a good premium to NAV (net asset value) yet Empiric Student Properties trades at 90p, someway below its 107p NAV.
“There is currently a huge amount of corporate activity happening in the London stock market right across the market. Private equity can see the value in UK equities. So should we.”
As Covid-19 restrictions end in England, the UK enconomy is likely to get a boost. Five fund managers give their forecasts.