UK remains on recovery trajectory
Dan Nickols, co-Head of Strategy, UK Small & Mid Cap, says the UK’s economic activity is on the path to reach pre-pandemic levels, with a pick-up in M&A activity and increased IPO issuance also supporting a boost to investor sentiment.
In my view there are three reasons – amongst others – to remain constructive on the mid and small cap part of the UK market.
The first is that the outlook for growth is encouraging. Although May’s monthly GDP data disappointed, we shouldn’t be too worried about that. It’s fair to say that we have been conditioned to expect a positive surprise with each UK data release since the turn of the year. Sectors such as accommodation and food service, which are linked to reopening, have seen robust growth month on month. Industrial production rose only modestly, and the transport sub-sector contracted. That was more due to a temporary lack of inputs rather than lack of demand.
Some commentators have moved back their assessment of when the UK activity will reach pre-pandemic levels to Q4 from Q3, but I don’t personally think that is especially significant. The UK recovery trajectory is still very much intact and there is no undue cause for alarm.
Secondly, there has been a pick-up in M&A activity and that provides some evidence of changing sentiment towards the UK. For investors that’s a difficult dynamic to capture on a consistent basis, but the UK small and mid cap universe in general should benefit indirectly.
The sentiment towards the UK is slowly changing for the better after being shunned by international investors. The latest fund managers’ survey from Bank of America points to an improvement in interest in the UK, although it still lags behind the US and the eurozone. Also, the UK trades at a discount to the rest of the world on a 12-month forward PE basis. So, all else being equal, we can expect M&A activity in the UK to continue over the remainder of this year.
Thirdly, the level of IPO activity has been the best in a long time, which is a general barometer of positive risk appetite. About 9.8 billion pounds was raised in the first half, the largest amount raised since the first half of 2014. I expect a pretty vibrant second half of the year.
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