News that the UK economy grew at is slowest pace since the beginning of the year is not shaking the faith of multi asset managers in the merits of holding domestic equities.
According to ONS data, UK GDP rose 0.1% month-on-month in July, a sharp slowdown on the 1% growth recorded in June and well below the consensus expectations of 0.5%.
While July is the sixth month in a row that UK economic output has expanded, GDP still remains 2.1% below its pre-pandemic level, which has raised concerns of stagflation amid inflation concerns.
“A sixth consecutive month of growth might sound reassuring, but growth of only 0.1% in July falls well below even cautious expectations – and coldly exposes the fragile reality of the recovery in general,” said Derrick Dunne, chief executive of You Asset Management.
Despite this, Dunne added that now is not the time for savers and investors to lose faith in UK equities.
“Slowing though it may be, the recovery is still for the moment underway and continues to present important opportunities,” he said. “Continue to embrace them, but don’t lose sight of the spectre of inflation and its possible consequences in the months ahead.”
Recovery plays
Given July’s stat includes ‘Freedom Day’, Paul Craig, portfolio manager at Quilter Investors, noted the GDP growth was particularly disappointing. However, he added these environments are ones in which quality businesses can thrive.
“Those with pricing advantages and strong competitive positions will benefit from an uptick in inflation, while those with established and resilient supply chains should overcome the current issues,” he said.
“Investors will want to pay attention to these businesses as the recovery plays out as that is ultimately where the value will lie,” Craig added.
Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, said the pace of growth was always going to slow from the exceptional figures seen since January, but added the impact of the ‘Delta’ wave of covid-19 infections added to the deceleration.
“Whether it was fear about catching the virus, the impact of self-isolation on a household or concerns about being caught up in the so-called ‘pingdemic,’ it appears that individuals exercised a degree of caution over the month despite restrictions easing,” said Blackbourn.
However with the UK economy continuing to normalise, he said that it is likely that the Bank of England will look through the disappointment as it continues to evolve its thoughts on the outlook for inflation.
“The Bank will be more interested in how price increases develop in the coming months as some indicators of peaking emerge,” he said. “Of course, much still depends on vaccines continuing to prove effective, both in terms of longevity and against any further variants of covid-19 that emerge.
“However, UK assets appeared optimistic this morning [Friday] with sterling stronger, gilt yields a touch higher and UK equities rising.”
Look forward not back
Justin Onuekwusi, head of retail multi asset funds at LGIM, also remains relatively optimistic on the UK economy, despite the flat July
“While the output we saw in July was disappointing versus consensus, we have to remember is that GDP is always backward looking,” he said. “Our analysis suggests the leisure & travel sector should see a bounce back in August as a result of the staycation activity we witnessed.”
As a result, while UK consumption could face some headwinds in the coming months as the furlough scheme ends on 30 September, Onuekwusi still expects GDP to recover in August.
He added that because ‘Freedom Day’ took place towards the end of the month on July 19, much of the benefits of the UK reopening will start to be seen in August’s GDP figure.
“The high frequency data that we look at suggests a bounce back in UK GDP in August, leading to our forecasts to be ahead of the consensus,” he said.
“We are currently neutrally positioned in the UK because we feel that there are other opportunities within equities, such as technology and other reopening trades,” he added. “It must also be noted that any strength or weakness we see in the UK economy won’t necessarily pass through to UK stocks, as revenues of the larger UK companies are driven by more international influences.”
