As the UK economy reopens, there are “outstanding opportunities” to invest in smaller companies, according to Axa Investment Managers portfolio manager Dan Harlow.
Having endured a turbulent year amid the Covid-19 pandemic, the UK’s successful vaccination programme and lifting of government restrictions have created opportunities in sold-off, domestic sectors such as retailers and leisure companies, says Harlow.
“We are optimistic about the recovery for UK domestic names as the UK economy opens up. While some may need further support to see them through until the benefits of the unlocking are felt, there are some great opportunities out there now.
“Restrictions may be relaxed in large parts of the UK but overseas travel restrictions in 2021 remain fairly strict with limited options for British people to spend the near £62.3 billion abroad on overseas travel as seen in 2019.”
While 2020 was the ninth successive year that the MSCI UK Index delivered lower returns than the MSCI World Index, Harlow says the “sharp, consumer-led UK recovery” has added to the current opportunity.
Harlow, who favours companies including Hollywood Bowl and Gym Group, says: “We expect to see some FOMO now for the UK. The market’s valuation is below others, while for small caps in particular the worries over Brexit and Covid-19 are dissipating, all of which are positives for domestic-facing UK companies.”
However, the key challenge facing companies is inflation pressure, after the latest figures showed it hit 2.5% in June, up from 2.1% in May and above the Bank of England’s 2% target.
Harlow adds: “A number of companies are looking at ‘value engineering’ to help drive cost out of production, while the majority will look to pass higher input costs on in a timely manner. Pricing power has always been a key focus in our investment process and we will soon discover who is able to successfully achieve this.
“However, smaller companies generally have been particularly conservative in their earnings outlook and we are encouraged that the mantra of ‘under promise, over deliver’ is largely being adhered to.”
