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UK stock market review – a quarter of recovery for some

In the first of our new in-depth quarterly sector reviews for the UK, we look at how the coronavirus crisis has impacted the UK economy, how UK funds have coped, and share our outlook for the future.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Economies and stock markets across the globe have seen a major shake-up this year, and the UK was no exception. The coronavirus crisis has impacted all parts of our daily lives – from the way we work to the way we communicate with friends.

The rate of new infections is thankfully on the decline. The number of new cases reported daily has fallen significantly from a peak of over 8,700 in April. But while the virus caseload seems to be heading in the right direction, it's sadly claimed almost 46,000 lives in the process.

In this UK sector review, we look at what's happened in the UK economy, and share our outlook for the future. We also take a closer look at how UK funds, including our Wealth Shortlist picks, have performed.

Please note nothing in this article should be seen as advice. If you're not sure if an investment is right for you, please contact us about our advisory services. Investments will rise and fall in value, so you could get back less than you invest.

What's been happening in the UK economy?

The first two documented cases of coronavirus hit UK shores on 31 January 2020 and the caseload snowballed from there.

In March, the Bank of England cut the baseline interest rate from 0.75% to 0.1%, the lowest level in history, in an effort to boost the economy. When the base rate is lower, the interest savers get on their cash is lower, meaning they're more likely to spend or invest it.

The government later imposed a nationwide lockdown, meaning people couldn’t leave their homes for anything but essentials and exercise. They also announced billions of pounds worth of measures to protect the economy from the virus, including the furlough scheme which at its peak was supporting around nine million workers.

The impact on UK businesses was profound, with most unable to operate over the period. The latest data suggests the UK economy shrank 19.1% over February, March and April. But there are some early signs of recovery. In May alone, the economy grew 1.8% as the nation began to emerge from lockdown. Around 89% of businesses were in operation at the end of June, with more planning to start trading in July and August.

But even when they're open again, lots of businesses will face huge challenges. Social distancing measures mean many businesses can't accommodate their usual number of customers. Consider restaurants – you’re not going to fit as many diners in the restaurant if each group must be two metres apart. That means restaurant takings will be lower.

Another concern is that the uncertainty causes companies to cut costs by scaling back expansion plans, or laying off workers. If people are fearful for their jobs, they'll put off big decisions like buying a new house or car, until there's more certainty. This could ultimately cause a drag on the growth of the economy.

Some estimates suggest that the size of our economy will still be well behind pre-crisis levels at the end of next year.

Remember Brexit?

With everything that's been going on with coronavirus, you'd be forgiven for forgetting about Brexit.

The UK officially left the European Union on 31 January 2020 and is now in an eleven month transition period. During this period, the UK remains in the EU's customs union and single market, and must obey EU rules. The UK needs to agree and ratify a trade deal with the EU before 31 December 2020, or the transition period will end without a trade deal.

Uncertainty around our future trading relationship with the EU could mean businesses delay making investment decisions until there’s more clarity. This could cause a further drag on the growth of the economy.

Does this change the long-term outlook for the UK?

The UK stock market is likely to remain sensitive to daily news flow about coronavirus and Brexit. Even though we’ve seen some stability in markets more recently, investors will likely want more reassurance that the coronavirus crisis is being handled effectively, and that we're making headway in Brexit negotiations.

Our long-term outlook for the UK remains positive though. The UK stock market is truly diverse, with many companies making money both overseas and on home soil. That means they're not reliant on the UK economy to perform well. You can choose from global leaders in fields like consumer goods and pharmaceuticals, through to higher-risk smaller firms operating in cutting-edge industries and aiming to become the giants of tomorrow. In the middle there’s a whole host of medium-sized firms which combine some advantages of scale with the capacity to grow quickly.

There are also a number of exceptional fund managers with a proven ability to make the most of what the UK stock market has to offer.

We think the UK stock market is one of the world's most unloved, and that's made it good value. The chart below shows our favourite measure of value – the cyclically-adjusted P/E ratio (CAPE) for the UK market, along with the average over time. You can see current valuations are well below average. Investing when valuations are low gives you a better chance of long-term success, though there are no guarantees. You shouldn’t look at ratios on their own though, they should be considered when looking at other factors.

Chart showing the UK market looks good value

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: HL to 30/06/2020.

There’ll always be short-term volatility in stock markets, and things could get worse before they get better. But we suggest investors focus on the long term. In previous crises, those who invested in a diversified portfolio and held on to their investments for the long term have generally been rewarded. And long-term investors who saw share price weakness as an opportunity to add to existing investments at a more attractive price fared even better. Although past performance is not a guide to the future.

How have UK funds performed?

The UK stock market fell 13.0% over the past year (up to 30 June 2020). The IA UK All Companies sector fell 11.1%, meaning the average fund outperformed the broader UK stock market by 1.9%*.

Smaller companies outperformed their large and medium-sized peers on the whole, benefiting funds that had higher weightings in smaller companies.

Funds with a focus on companies capable of above-average growth (often measured in earnings or cash flow), otherwise known as 'growth' companies, also did well. These companies were favoured for their more defensive characteristics, like stable earnings and more reliable dividends.

On the other hand, 'value' focused funds aim to uncover hidden gems – companies whose share prices don’t necessarily reflect their actual worth or earnings potential. These businesses might’ve fallen on hard times, but are often undergoing a turnaround that’s yet to be reflected in their share price. Companies in sectors like oil & gas, mining and banking have fallen into the value camp in recent years. Value-focused companies performed particularly poorly over the past year.

Premier UK Growth was the top-performing fund in the IA UK All Companies sector over the past year. Managers Jon Hudson and Benji Dawes look for high quality companies with strong financials and competitive advantages over the competition. They also consider the economic conditions and what impact they could have on the companies they invest in. The fund's performance was helped by the managers' growth-focused investment style, which has been in favour, and their large bias towards higher-risk smaller companies, which performed well.

The managers have delivered strong performance since they began managing the fund in November 2017. But their analysable track record is relatively short, so we're not considering the fund for addition to the Wealth Shortlist at this time.

Jun 2015 - Jun 2016 Jun 2016 - Jun 2017 Jun 2017 - Jun 2018 Jun 2018 - Jun 2019 Jun 2019 - Jun 2020
Premier UK Growth -8.5% 25.0% 13.4% -1.2% 8.9%

Past performance is not a guide to future performance. Source*: Lipper IM to 30/06/2020.

Find out more about Premier UK Growth, including charges

Premier UK Growth Key Investor Information

Research team activity

We met a number of fund managers via video call over the past three months including Imran Sattar, one of the managers of the Majedie UK Equity fund. The fund's managed by a team of four whose different strengths, styles and areas of focus are carefully blended together. Each manager is free to invest their portion of the portfolio wherever they see the best opportunities. The fund features on the Wealth Shortlist of funds we believe to have excellent long-term performance potential.

Sattar's been at Majedie since June 2018 but he's also gained a significant amount of experience at other firms. Following our meeting, we feel he's got his feet firmly under the desk at Majedie, and has made his portion of the portfolio his own. We think his more growth-focused approach blends well with the more value-orientated styles of some of the other managers. Sattar sees volatility in the stock market as an opportunity and believes he's currently able to buy shares in great businesses at very attractive prices.

We also met Alessandro Dicorrado and Steve Woolley, the duo that recently took over the Ninety One UK Special Situations fund from well-regarded predecessor Alastair Mundy. The managers have increased their investments in travel and tourism-related businesses. They believe these companies have the potential to perform well as life gradually returns to normal, post coronavirus. They've also increased the fund's international investments to make use of their experience in global investing.

The managers are using a well-established investment process, but we'd like to see them get more experience of running a UK fund before gaining greater conviction.

How have our Wealth Shortlist funds performed?

Our Wealth Shortlist selections have delivered mixed performance over the past year, relative to the broader UK stock market. We'd usually expect this though. If all of your funds in a given sector are performing well at the same time, they're probably investing in similar areas. That's great when those areas are in favour, but can be painful when they're not. We prefer to take a diversified approach by investing with managers who have a variety of strengths, styles and areas of focus.

The best-performing Wealth Shortlist fund in the UK Growth sector was AXA WF Framlington UK. It beat the performance of the UK stock market and its peers in the IA UK All Companies sector, although it still lost money. We put the fund's strong performance down to the manager's ability to select outstanding companies, regardless of what size they are or sector they're in. His growth-focused investment style also boosted returns, according to our analysis.

The weakest performer was Fidelity Special Situations. Alex Wright, the fund's manager, invests in companies that often go ignored by other investors. Maybe they've missed a profit target, or the management team made some unpopular decisions. Either way, they must be capable of a recovery. This investment approach has been out-of-favour, and the fund's underperformed both the broader UK stock market and its peers in the same sector over the past year.

This is disappointing, but not necessarily unexpected given the headwinds the fund's faced. We're encouraged it's outperformed the index of value-focused UK companies over the period.

Overall Wright is an experienced manager who's prepared to think and invest differently from the crowd. Investment styles go in and out of favour over time, but we're encouraged the manager has never deviated from his longstanding investment approach. We think this fund has good growth potential over the long term, although there are no guarantees.

Here’s how our Wealth Shortlist funds have done.

Jun 2015 - Jun 2016 Jun 2016 - Jun 2017 Jun 2017 - Jun 2018 Jun 2018 - Jun 2019 Jun 2019 - Jun 2020
AXA WF Framlington UK N/A 23.9% 11.2% 3.2% -6.9%
Fidelity Special Situations -4.1% 30.6% 8.2% -2.8% -19.6%
LF Majedie UK Equity -5.6% 23.4% 7.5% -6.7% -11.4%
Liontrust UK Growth 9.1% 20.1% 11.4% 2.9% -10.2 %
Unicorn Outstanding British Companies 3.6% 14.5% 12.5% -0.3% -10.1%
FTSE All-Share 2.2% 18.1% 9.0% 0.6% -13.0%
IA UK All Companies -3.8% 22.6% 9.2% -2.1% -11.1%

Past performance is not a guide to the future. N/A - full year data unavailable

Source: Lipper IM to 30/06/2020.

Please note the Liontrust UK Growth and LF Majedie UK Equity funds invest in Hargreaves Lansdown plc.

Find out more about AXA WF Framlington UK, including charges

AXA WF Framlington UK Key Investor Information

Find out more about Fidelity Special Situations, including charges

Fidelity Special Situations Key Investor Information

Find out more about LF Majedie UK Equity, including charges

LF Majedie UK Equity Key Investor Information

Find out more about Liontrust UK Growth, including charges

Liontrust UK Growth Key Investor Information

Find out more about Unicorn Outstanding British companies, including charges

Unicorn Outstanding British Companies Key Investor Information

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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