Investment Week 10-12-2012

Chancellor George Osborne’s Autumn Statement on 5 December refocused attention on the state of the UK economy, which did not bear up to much scrutiny since it appeared to be weakening on almost all metrics. Austerity measures have made little dent in the government debt mountain and growth remains elusive – but does this mean it is time to abandon the UK equity market?

The mainstream UK equity sectors have been flying below most investors’ radars over the past year – neither offering the cyclical excitement of Europe nor delivering the horrors of Japan. Those who were invested have secured comfortably double-digit returns but fund flows have not followed.

The giant UK All Companies fund grouping has been one of the year’s worst-selling sectors – it has been bottom of the heap in eight out of the past 12 months. This is perhaps because the UK has had little to recommend it to investors – its market is naturally defensive, so people do not tend to pick it at times of rising risk appetite. It has also been a victim of the current vogue for global, rather than geography-specific, funds.

Is that likely to change in 2013? After all, investors may have switched their preferences recently but the UK still makes up a substantial weighting in many portfolios. Judging by the two most recent sets of IMA statistics, investors appear to have started moving from bonds and many market watchers believe the first port of call for this capital will be solid, defensive, high-yielding shares. If this proves the case, UK equities may find favour.

A number of commentators have suggested the US global brand names are likely to be the chief beneficiaries of the recovery in the US and China, but there is no reason this should not extend to UK groups such as Unilever or Diageo, who are also forging a path in emerging markets.

It also has to be said that, on a yield of 3.5% and an average price/earnings (P/E) ratio of 12.5x (according to the FT as of 6 December) the UK market looks pretty cheap. In comparison, the S&P 500 is on 15x, with a yield of just 2.6%, and the German Dax is trading at a similar level, despite widespread loathing for eurozone markets. The French market is trading on 14.4x. Even Spain, with a P/E of 12.2x and yield of 5.2%, does not look radically different. The UK economy may be weak and weakening but it is by no means Spain.

The problems facing UK corporates are no different from those around the world. Margins are high and there is a question mark over whether they can be sustained at current levels but the UK market offers more scope and a more stable domestic backdrop than many other countries. The UK economy looks horrible but the UK markets may fare substantially better.

DECEMBER 2012

 Important Note: Material within this article has been complied with the help of the Marketing Hub which is part of Marketing In Practice Ltd on behalf of your professional financial adviser. The contents of this document do not constitute advice and should not be taken as a recommendation to purchase or invest in any financial product. The value of a market investment can go down as well as up and you may not get back the full amount, particularly in the short term. Before taking any decisions, we suggest you seek advice from a chartered financial planner.

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