Despite recent sharp falls in the FTSE 100, fund buyers remain confident in the value of UK equities over the long-term.
According to FE Fundinfo, the FTSE 100 has fallen more than 27% since 20 February, the most of all major developed stock markets. But while this had led many commentators to suggest the long running bull market has finally come to an end, both Chris Metcalfe, investment and managing director at Iboss, and Alastair Mundy (pictured), manager of the Investec Cautious Managed fund, remain bullish on the long-term prospects for UK equities.
“This is the first market event for a decade that has happened outside of central bank control,” says Metcalfe. “The sell-off in oil has compounded the situation and has been enough to knock the equity market off its perch.”
UK hit hard because of its market composition
Mundy notes the reason the UK has been hit much harder than other markets is the result of its composition, housing a number of oil stocks and not many traditional defensive names.
“The UK has many stocks which are economically sensitive and these are the companies that no-one wants to own right now,” he says. “For me, the opportunities right now lay in the cyclical stocks, namely those companies exposed to consumer spending, such as banks, retail or leisure.”
Mundy’s optimism stems from the recent coordinated response to the crisis from both the Bank of England with the interest rate cut and the government’s promised spending in the recent budget, which it beefed up on Tuesday.
“We think this joint response could help the UK consumer through this tough time,” he says. “Ultimately we will come out of the other side of this crisis, and people will return to the cinemas, go on cruises and go shopping again.
“While the share prices reactions today are depressing, you always have to think of the longer term and we think the long term picture is much better than it appears right now.”
Baby is getting thrown out with the bath water
Metcalfe agrees, arguing that right now there appears to be a great buying opportunity in the UK, on a relative basis.
“We are trying to avoid those assets that are expensive relative both to available peer group and to their own history,” he says. “In this context, UK assets today look very good value.”
For Metcalfe much of this buying opportunity comes down to the recent wave of what he thinks is panic selling from investors.
“The baby is getting thrown out with the bath water, as it always does, and hopefully will always continue,” he says. “This is when you want the good active managers looking around and seeing the opportunities as sectors across the market get tossed in the bin.
“Of course there are good and bad companies in each sector, but the whole point of good active managers is being able to pick out the best on a long-term basis, so we see the current uncertainty as a fantastic buying opportunity.”
Alongside UK equities, Mundy is also retaining a weighting in gold and silver investments, on the belief both could prove “interesting” assets to own if inflation pick ups after this recession.
“Gold is the classic defensive asset if you think inflation could rise and we think that all this recent government policy could lead to higher inflation in the years ahead,” he says. “We also think there is going to be a commitment to keeping interest rates very low, making both gold and silver good assets to own.”
