There is a considerable level of doom and gloom in markets at the moment. Rising prices are increasing concerns around a cost of living crisis and central banks seem hellbent on increasing rates, just at a time economic indicators start to weaken.
However this is not all bad news for UK equities, and one may argue much of the negativity is already priced in. Here are five reasons to be positive about UK equities in the current environment.
1: Defensive Composition
The FTSE 100 is highly weighted towards defensive sectors that have so far held up fairly well during this year’s sell off. The FTSE 100 is down just 3.7% so far in 2022 whilst the S&P 500 has shed 20%. This is due to the FTSE 100’s weighting towards sectors such as pharmaceuticals, financials, and oil companies.
Oil major have benefitted from soaring energy prices and financial’s thrive in higher interest rate environments.
Energy prices and interest rates have caused severe volatility in some areas of the market, not so for the FTSE 100.
2: Central Bank Options
Central Bank action is largely responsible for the sell off in global equities this year. The selling was pronounced in US equities, in particular the tech sector that suffered as the Federal Reserve began rising rates.
The Bank of England has also raised rates, and will likely raise rates further. However, this is broadly priced into stocks now and we are actually in the favourable situation of central banks having plenty of room for manoeuvre to stimulate the economy, should we enter a recession.
If central banks continue to hike rates through the summer, they will be at the highest levels for well over a decade and will provide MPC and Fed voters with significant scope to ease monetary policy in the future, and markets love an easing of monetary policy.
3: Resilient Earnings
Investors will be looking forward to bumper updates from BP and Shell at the end of July which will likely provide support for the broader index.
The oil majors will of course be standout earners but the picture throughout the rest of the market isn’t as bad as one would think, given the backdrop of rising prices and softer growth.
For all the concern around Chinese growth, Burberry still managed to carve out a 1% increase in group sales in Q1 while comparable sales excluding mainland China rose 16%.
This resilience is not limited to FTSE 100 companies. For example, Topps Tiles provided a positive trading update for the 13-week period ended 2 July 2022.
“Despite the continuing headwinds from lower consumer confidence, supply chain challenges and high inflation, trading remained encouraging and in line with our expectations in the third quarter, with Group sales up 9.2%,” said Rob Parker, Topps Tiles CEO.
Hostelworld recently said revenue was at 104% of pre-pandemic levels while housebuilder Vistry said they were seeing “good demand across all areas of the business” and saw earnings at top end of forecasts.
Although these recent trading updates don’t provide a full picture of how costs are impacting profits, a strong top-line will support earnings.
4: Bumper UK Dividends
Should we see further volatility in UK shares, forcing investors to wait for capital appreciation from their portfolio, they will be handsomely rewarded for the wait through bumper dividends from UK companies.
“The FTSE 100 is now expected to yield 4.2% in 2022, thanks to the combination of share price falls and increases in dividend forecasts. The index’s total dividend pay-out is expected to reach £85 billion in 2022 excluding special dividends, up from £78.5 billion in 2021,” explains Russ Mould, investment director at AJ Bell.
“It means total payments could surpass 2018’s record, although the current expectation is that they come in just shy of the £85.2 billion record.”
5: There’s No Guarantee of Recession
Higher grocery prices, mortgage payments and fuel costs will curtail household spending power, but it doesn’t neccessarily guarantee a recession. Indeed, the UK economy grew 0.5% in May dispelling concerns we are currently in a recession.
Market commentators like to throw the word ‘recession’ around as it gets people attention. However, the reality is we are looking at a period a slowing growth, rather than sustained economic contraction.
