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Boom time for ‘beer, banks and bricks’ in the UK
Barclays (BARC) boss Jes Staley recently outlined his bank’s prediction that the UK is about to enjoy its biggest economic boom since the aftermath of the Second World War as vaccines provide a route out of lockdown and pent-up demand, backed by cash saved in lockdown, is unleashed.
While this is leading to concern about inflation in the medium term, in the short term it may well see small and mid-cap domestic-facing stocks outperform the more overseas-focused FTSE 100 and other major global markets.
The FTSE 250 has already marked all-time highs in 2021 off the back of the UK’s success with its vaccine rollout. The list of top performing mid cap stocks since the start of the year is dominated by names which are in line to benefit from a reopening of the economy, including Wagamama-owner Restaurant Group (RTN) and cinema operator Cineworld (CINE).
Despite already enjoying a strong run, BMO chief economist Steven Bell still believes this part of the market looks attractive in relative terms.
‘Beer, banks and bricks we think are three themes to put into a UK portfolio,’ he says – implying a positive outlook for the financial sector, alongside pubs groups and the property market.
Noting that BMO was negative on the UK from the Brexit vote in 2016 before becoming positive in 2020, Bell observes that the UK economy has been ‘quite impressive’ in its resilience to the pandemic with much less damaging impact on employment and lower than expected bankruptcy levels.
‘We like the UK fundamentals, it is still the favourite underweight position for international investors and so it should benefit as that unwinds,’ Bell adds.
A more positive UK economic outlook is likely to see sterling outperform other major currencies, and this is typically bad news for the FTSE 100 as it hits the relative value of overseas earnings. Around 70% of its constituents’ earnings are derived abroad.
As the table shows all three UK-focused investment trusts with a bias towards the mid cap end of the market trade at discounts to net asset value (NAV).
The top performer on a five-year view is Mercantile (MRC), managed by Guy Anderson and Anthony Lynch at JPMorgan Asset Management, with a total return in share price terms of 90%.