Here’s why investors shouldn’t rule out the UK next year, according to active fund managers Gervais Williams, Jon Hudson, Emma Mogford, Matthew Tillett and Paul Marriage from Premier Miton.
Jon Hudson, Fund Manager, Premier Miton UK Growth Fund
Brits are often caricatured as being like their weather; gloomy and miserable. This caricature has often held true for their perceptions of the country’s economic prospects. Much ink has been spilled recently about the UK’s sluggish economy and the slow death of its equity market. While sentiment in the UK has been dented by the recent Budget, and there have been several unpleasant surprises in economic data, we retain conviction that the UK market and economy is likely to be ‘best of the rest’ when compared with the currently thriving US.
For a start, despite its woes the UK looks like a paragon of stability when compared with France and Germany. The Eurozone’s two largest economies are plagued with stagnant or stagnating economies and political instability, with many questioning the long-term viability of Germany’s economic model in particular. The UK has now cleared the three hurdles weighing on decision making, namely the UK election, the UK Budget and the US election. Despite weakness in recent macro data, UK household balance sheets are strong, buoyed by a higher savings rate in recent years and rising wages. When sentiment turns, the consumer arguably has scope to spend.
Many private equity investors share our view there is value in UK markets, as shown by the year’s many take-private transactions. Should anxieties grow around US equity valuations, which look to us increasingly strained, investors may look to the UK as an attractive home for their capital. They will find many industry-leading companies with strong balance sheets and good prospects for long-term growth. Further signs of life in the IPO market and further M&A activity may well serve as a catalyst for increased investor interest. Hopefully, 2025 will bring a sunnier outlook for UK investors (actual sun would also be welcome!).
Emma Mogford, Fund Manager, Premier Miton Monthly Income Fund
I think the UK will positively surprise investors in 2025. Since the Brexit vote in 2016, there has been further political uncertainty which has held back investment – both for UK companies and foreign companies. However, we are now moving to a much more stable investment environment in my view. The government is keen to kick-start infrastructure spending, and we see opportunities in areas like the electricity network, which is already attracting increased investment.
The consumer is relatively well off, with a savings rate still considerably higher than it was before 2020. When confidence returns, we expect the unlocking of those savings to boost consumer spending. The increase in minimum wages will also put more money in the pockets of workers on lower wages. Victims of the infected blood scandal of the 1970s and 1980s and the more recent Horizon IT British Post Office scandal are due to get more money in compensation, and there are potential payouts from banks who mis-sold motor finance. We saw that payment protection insurance (PPI) payments had a positive impact on spending in the last decade, so perhaps we can expect something similar?
The counter argument to all this, of course, is that the cost of debt and in particular mortgages will rise as government debt grows, which could negatively impact spending. However, I see this risk as low at the moment, as the current level of interest rates appears to be bringing inflation down. I also believe unemployment will remain low despite pressures on companies to pay more National Insurance.
Matthew Tillett, Fund Manager, Premier Miton UK Value Opportunities Fund
I believe UK equities continue to offer a compelling blend of low valuations, reasonable medium-term earnings growth prospects and generally sound balance sheets. This should continue to attract an increase in inbound M&A activity as private equity and overseas buyers look to take advantage of the attractive value that is on offer. Widespread share buyback activity across the market should also continue.
Outperformance versus other major equity markets, particularly the US, will likely be determined by two factors. Firstly, if the UK economy can defy the sceptics by continuing the steady improvement that began in 2023, then this should be taken very well, particularly in the more domestically focused small and mid-cap segment, and in turn help to ease some of the market concerns that have arisen post the Labour government’s first Budget. We are cautiously optimistic on this front, while recognising that there will likely be bumps in the road. Secondly, the impact – positive or negative – of the new Trump administration’s policies on both the US economy and the rest of the world, including the UK, remains to be seen. Investors should keep in mind that the widespread view that Trump will be a positive for the US and a negative for everywhere else may prove to be misguided. Tariff barriers, mass deportations and tax cuts at a time of historically high debt and fiscal deficits may ultimately have negative consequences for the US economy, and it is already a highly valued equity market.
Paul Marriage, Fund Manager, TM Tellworth UK Smaller Companies Fund
We end 2024 with the same sort of cautious optimism that we ended 2022 and 2023. Will 2025 finally fulfil that heady expectation? The reasons to be cheerful are that the sector generally trades well in an interest rate cutting pro-domestic environment. Our portfolio is not especially rate sensitive, and we are not over-reliant on UK revenues in most of our investments, of course. The Budget has not dealt a fatal blow to the AIM market as feared. Our stocks have not re-rated upwards in any material way this year, valuations have remained resolutely modest and, in some cases, derisory.
What do we need to see to make our inherent optimism become a reality? The start of 2024 was marked by a high frequency and severity of incoming M&A, that dissipated over the summer as the Budget stalled some deals, but we believe there is evidence that buyers are now returning. The continuation of this theme sees global buyers from all walks of life – trade, private equity, sovereign wealth and any combination thereof – paying significant cash premia for UK plcs – but we assume they still think they are getting a good deal. This activity is real money nonmarket participants saying that the UK is too good an opportunity to miss. Logically market participants and asset allocators might then follow suit. The Chancellor’s Mansion House speech was a good opportunity to change the narrative post Budget and her proposals to encourage UK equity investing are helpful if lacking in detail. We expect the first long term asset funds (LTAFs) to start allocating to UK smaller companies in the first half of 2025. These are a very welcome new buyer to the market.
The groundhog half decade of expectant revival in the sector is now firmly in broken record territory. We have moved on from broken clocks, as they don’t seem to generate buyers once a day let alone twice. We believe those that are brave enough to be invested at the point of sentiment improvement, and thus endangered species contrarians, will be the ones to make the most money when the beans are counted.
Gervais Williams, Fund Manager, Premier Miton UK Smaller Companies Fund
After a relatively good year of steadily rising share prices in 2024, I suspect 2025 might be a lot more volatile. One of the features about asset markets is that they can be very spikey, especially at times of significant economic and political change.
Specifically, there is a risk that quite a few large-caps won’t be able to dodge the radically changing economic and political bullets. Clearly, quite a few small or micro-caps might get caught out as well. But there will be others that don’t just survive better, but also happen to be in exactly the right place at the right time and deliver quite exceptional returns.
Furthermore, if bond yields remain elevated, and there were to be a global recession, then various private businesses might become insolvent in significant numbers. Numerous zombie companies would potentially fail as well.
At times like this, there is scope for well financed businesses to accelerate their growth, as they expand into the vacated markets. Or better still buy an overleveraged, but otherwise viable business, debt-free from the receiver for a nominal sum – sometimes as low as £1. These kinds of acquisitions can sometimes deliver transformational returns for quoted small or micro-caps.
In short, for the first time since 2015, I believe 2025 will be defined by small and micro-cap outperformance. And given that UK small and micro-caps are currently standing at unusually low valuations, we believe they have great upside potential.
Risks:
The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.
Forecasts are not reliable indicators of future returns.
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