Q: Which asset classes, sectors or strategies are attracting your attention and why?
There are a number of reasons to be optimistic about UK equity markets, particularly the smaller company segment. We are seeing opportunities to invest in high-quality businesses, with strong earnings growth and cash generation, trading at a significant discount to large caps and international peers. The elevated takeover activity experienced through 2023 shines a light on the opportunity, and ultimately further takeover activity could act as a catalyst to drive a re-rating from here.
Despite ongoing macro-uncertainty, analysis of market corrections over many years indicates that when the smaller company segment emerges from a period of market drawdowns, the recovery can be stark and rapid, driven by improving risk appetite and the weight of money returning to the sector – we may well be entering that period now.
Q: What asset classes should investors be thinking about beyond equities and bonds?
Private equity has experienced relatively buoyant markets over the past decade, supported by low interest rates. There has been significant growth in fundraising which has led to record deployment (especially in 2021/22), without the matching exits to provide liquidity for LPs. Exits via IPO are unlikely at present given the current equity market backdrop and private exits have been limited as a result of the changing interest rate environment.
See also: Will M&A and buybacks breathe life into the UK stockmarket?
As a result, secondary strategies are rising in prominence, acting as a strategic tool for private equity businesses and their investors to manage liquidity, while not being forced sellers of their high-quality assets at unattractive valuations.
Q: How do you see sustainable and ESG-oriented investing evolving?
What was a relatively new phenomenon five years ago is now entering the mainstream. Even those that do not back the sustainability agenda are constantly talking about it – hence it is here to stay. More disclosure and uniformity in reporting is required to simplify investment decisions based on ESG criteria. It is too simplistic to suggest there has to be a trade-off between financial returns and having an impact. The two are not mutually exclusive. As with any investment it is about completing detailed due diligence and building conviction across all elements of the investment thesis.
See also: As governments roll back on green pledges, can the outlook for clean energy improve from here?
To read more visit the February edition of Portfolio Adviser Magazine
