With a good degree of recovery priced in, we discuss the outlook for UK equities.

  • Consumer confidence is rising as the economy recovers.
  • UK equities have rallied, with a good degree of recovery already priced in.
  • High-quality stocks that have been left behind in the recent rally appeal.

Spring has certainly sprung in the UK, with the sun out, bars and shops reopening, and encouraging data aplenty.

The UK consumer confidence index is now at its highest level since February 2020, before the introduction of Covid-19 restrictions. New data from the Office for National Statistics showed that retail sales rose far more than expected in March. Our enthusiasm to shop has extended to physical stores now they have reopened. Primark reported record sales in its stores in England and Wales in the first week after reopening, with footfall for the whole estate back to pre-Covid-19 levels. Also, the flash UK composite PMI (purchasing managers’ index) surged from 56.4 in March to 60.0 in April, driven by gains from both the services and manufacturing sectors.

These data points suggest that the economy has begun to gather momentum. This is undoubtedly good news, but what does it mean for UK equities? With a good degree of recovery already priced in now following the vaccine-led rally that we have seen since November, it isn’t as simple as extrapolating the improving economic outlook to equities. For example, Associated British Foods, which owns Primark, and which we hold in our UK Equity strategy, saw its share price fall on the announcement of its encouraging report. It is also worth remembering that, while the UK is making good progress with vaccinations, we are still very much in the midst of this pandemic, with cases rising globally. Furthermore, we don’t yet know how long existing vaccines will provide protection. Rather than getting swept up in a flurry of optimism, we are more cautious, and our focus now is on finding high-quality stocks that have been left behind in the recent rally.

One example is Intertek, which we hold in our UK Equity and UK Opportunities strategies. The company provides bespoke assurance, testing, inspection and certification solutions for its customers across a range of industries. Intertek shares have lagged the broader recovery rally; however, we believe the company’s growth prospects remain firmly intact as its customers have ever-rising standards to meet for quality, safety and sustainability. The pandemic has clearly demonstrated the need for risk-based quality assurance. The events of the last 12 months have shown that many businesses don’t have real-time intelligence about their supply chains, a fact painfully exposed by bottlenecks in the chip market. The pandemic has also moved health and safety to the top of the agenda for companies, with many businesses finding their existing protocols woefully inadequate. Intertek’s services enable its clients to identify and manage these critical business risks.

As we are all aware, the world needs to invest in becoming a low-carbon society, and Intertek is able to help clients by using its carbon-intensity certification programme, or evaluating environmental impact through its carbon and water footprint evaluation service. It is worth adding that Intertek is itself a carbon-light business model, and 2020 marked its first carbon-neutral year. In our view, the company has been neglected by a market which, for now at least, is more focused on short-term drivers than long-term winners.

It looks set to be a brighter time for the UK economy over the coming months, but despite the improving outlook this is the time to keep a cool head. The UK is home to many high-quality businesses dialled into multi-year themes; they may not necessarily be immediate beneficiaries of a reopening economy, but this period could prove an attractive entry point for investors with a long-term horizon.


Louise Kernohan

Louise Kernohan

Head of Global Opportunities


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