Investing in UK shares – an HL Fund Manager’s view

The UK stock market has dragged its feet behind the rest of the world for over a decade. But the economy is now emerging from a deep recession.

Is it time for another look at the potential for UK shares?

There’s reason to be hopeful. Governments around the world are trying to stimulate their economies to help them pull out of the pandemic slump. President Biden is pushing trillions of dollars into the US economy, Chancellor Sunak is spending untold billions to keep momentum going in the UK.

The UK market is very international in nature, and lots of our largest companies earn a large portion of their income overseas. So, the UK stands to benefit from stimulus both at home and abroad.

This article isn’t personal advice. If you’re not sure if a course of action is right for you, ask for financial advice. Remember all investments can rise and fall in value, so you could get back less than you invest.

Read the video transcript

Why are UK shares now looking more attractive?

Schemes like furlough have benefited banks and kept bad debt under control – even as jobs were lost in their millions.

Now markets can sense that financial conditions could become more favourable for lenders. Ever since the financial crisis, banks have struggled to earn decent returns.

Ultra-low interest rates capped the difference between what they could earn from lending and the cost of attracting deposits. Bond yields have risen in recent months, raising the prospect of better margins ahead.

Commodity prices have also risen, with oil recovering back above $60 per barrel and copper prices hitting new highs in recent months.

Back home, the high street and hospitality industries have slowly re-opened as best they can and Brits are flocking back to pubs, shops and restaurants. The consumer has long been a key driver of the UK economy and here the news is looking better and better.

Retail sales in April bounced back much stronger than analysts expected, with shoppers flocking back to the high street. Clothing sales jumped by over two thirds from March, and bricks and mortar retailers clawed sales back from online retailers.

Consumer-driven sectors add up to around quarter of the UK’s market value. That’s a big slice that should see improved underlying trading. The question is whether this will drive share prices higher, or are better times already reflected in companies’ valuations?

Cutting down costs might help boost profits

Lockdowns shut down lots of industries. And others that could continue trading saw big falls in revenue.

Cost-cutting became necessary, after a decade of economic growth which saw some businesses put on a bit of weight.

One trend we’ve observed since the pandemic is companies investing to build their digital strengths. Introducing technology to automate processes drives down costs and waste, often helping businesses to improve their environmental profile.

My views on how technology improves businesses

Leaner businesses, seeing their sales on the mend should be able to capture a bigger slice of that income as profit.

We could be at the start of a period of very strong earnings growth as the recovery in the economy is amplified by those structurally improved margins.

The UK won’t be alone in benefiting, just as it wasn’t alone in suffering the impacts of the pandemic. But the UK market’s exposure to commodities, banking and consumer spending is higher than a lot of other nations.

In part this is because the UK is relatively underexposed to some other sectors.

Information Technology companies make up just 2% of the market’s value and medical technology stocks are few and far between in the UK.

Decades of takeovers have also left the UK market with relatively few industrial stocks. At the beginning of my career in the 1980s, sectors like engineering, building materials and chemicals were big sectors. Now you need a magnifying glass to find some of them.

Is now the time to invest in the UK?

Part of the reason the UK was out of favour for so long was the high exposure to the very same sectors that are currently looking up.

It’s worth remembering, commodities producers cannot control the prices they sell at. And banks are under attack from FinTech start-ups trying to steal their lunch. Consumer-facing businesses are welcoming customers back. But after the novelty of going back into shops, cinemas and restaurants has worn off, the trend of spending more online could reassert itself.

That said, big parts of the market are still poised to benefit from a recovery and improved lending conditions for banks, so this could be a good time to think about investing in UK shares.

How we look for UK shares

Our philosophy in choosing shares for the HL Select funds is to try and find companies with robust competitive moats, operating in industries that have the potential to offer predictable growth over the long term.

The UK economy is quite cyclical – some companies go in and out of favour depending on the health of the economy. So lots of our UK funds’ holdings earn the bulk of their money overseas. And we also look for digital winners in each industry so we can diversify where our investors’ money is held.

Find out more about each fund and how they’re invested.

Find out more about HL Select UK Growth Shares

Find out more about HL Select UK Income Shares

Steve Clayton is a fund manager of the HL Select range of funds.

HL Select Funds are managed by our sister company HL Fund Managers Ltd.