To the relief of many, the UK election turned out to be a simple affair. But while we avoided protracted wrangling over the make-up of the government, the key risk facing the UK now is the referendum on European Union membership. It is due to be held before 2017 – but some business leaders are calling for this to be brought forward to minimise the disturbance wrought by a long period of uncertainty.
In the worst case scenario, question marks could be raised over the position of the UK as a safe place to invest. “Over the last five to seven years the UK has been seen as a safe haven relative to Europe. I would argue that may reverse slightly,” says Stephen Message at OMGI.
Data shows investment in UK equity funds has been much lower than usual, and foreign direct investment (FDI) has been down too. This reflects how overseas investors are voting with their feet, explains Nathan Sweeney from Architas.
“Uncertainty is already having an impact as FDI flows into the UK have been negative for 12 months. Really this is being driven by uncertainty around the political situation,” he explains.
The landslide election of 56 Scottish National Party MPs north of the border is likely to revive calls for greater devolution of powers – or even a second independence referendum. “The strength of the SNP means that the Westminster citadel has to relinquish some of its power, which reduces the political strength of the UK,” Sweeney says.
The question now is whether international investors will come back to investing in the UK. Many fund managers believe they will.
“The constitutional issues of the next couple of years – Scotland and Britain’s position in the EU – are manageable,” says David Miller of Cheviot.
The UK economy has long been powered by the south east. But it came as a concern to many when new figures last year from the Office for National Statistics revealed the north and west of the country have weakened in their share of the economy, while London has grown its share of economic activity.
To address this chancellor George Osborne has announced plans for a “northern powerhouse” and has even appointed a minister to spearhead investment and stimulate growth in the regions.
One company which could benefit from more economic activity in the north is property company Harworth Group, which owns acres of land around former coalmine sites. Its plans to develop housing are being welcomed by locals, says George Godber of Miton, who owns the stock in his fund. It has been his best performing stock so far this year, and he believes it is a “fascinating company” with lots of potential.
“Most of its land is brownfield sites which are crying out for development. Getting planning permission to build housing on a colliery would not upset anyone,” he says. “Harworth will be a real, core beneficiary of the recovery in the regions.”
The need for better infrastructure has been a key issue for politicians. Britain’s road network in particular is in desperate need of improvement, and in December last year the government committed £15bn to resurfacing roads and adding extra lane miles.
Big road projects are likely to be announced as our motorways have already reached capacity. Moreover, the economic boost from new motorways is large. “There is no better way for the government to spend a pound than on roads because of the return on investment. You sink a pound and you get five pounds back,” Godber explains. He has invested in a company called Hill & Smith, which manufactures the barriers between lanes on motorways and the gantries which hold road signs.
Another company likely to benefit from more government spending on infrastructure is Costain Group, Godber says. This company was involved in major developments including the Channel Tunnel and rebuilding Birmingham central rail station, and will likely have a hand in any future projects.
As the economy continues to recover, people will feel more confident about doing up their homes.
This is known as RMI spending – or repairs, maintenance and improvements. Figures show that during boom times the average person spends £1,200 a year on their homes, but last year the amount was just £600. In aggregate, spending on new kitchens, loft conversions and home furnishings is still low.
Many fund managers are expecting companies related to DIY will do better as the economy continues to recover. Old Mutual’s Message has invested in kitchens company Howdens Joinery, which has 25 per cent market share in kitchens and is a business he describes as “brilliantly run”.
Miton’s Godber has invested in Topps Tiles and Norcros Group, which owns Johnson Tiles and Triton Showers, and should also see sales improve alongside the economy. “Topps Tiles controls a third of the domestic tiling market and they offer a greater range of tiles than if you go to B&Q,” he says.
FUNDS TO WATCH
CF MITON UK VALUE OPPORTUNITIES
If you would like to add some exposure to UK themes to your portfolio, George Godber runs the CF Miton UK Value Opportunities fund which is invested in all of the stocks he mentions in this piece. The fund was only launched two years ago, but has performed well. It has made 22 per cent since launch compared to just 8 per cent from the FTSE 350 index.
OLD MUTUAL UK ALPHA
Another good choice for accessing growth in medium-sized UK companies is the Old Mutual UK Alpha fund, run by well-known manager Richard Buxton. “He is a great stock picker over the long term and has a good track record,” explains Chris Mayo of Wellian Investment Solutions.
FRANKLIN TEMPLETON UK MID CAP
Mayo also recommends trying the Franklin Templeton UK Mid Cap fund. “It is an area that has historically done very well and this fund is suited to a more aggressive long-term investor,” he says.