CT Global Managed Portfolio Trust has taken a closer look at UK equities. After years pinned to the bottom of performance tables, the asset class is now potentially offering investors good value in a more favourable economic environment. We think lower interest rates and falling inflation warrants cautious optimism for UK equity trust investing.
Key takeaways:
- A more favourable economic environment could boost the performance of UK equities.
- The asset class is trading at historically low valuations, potentially offering investors good value.
- Smaller and medium-sized companies would particularly benefit from a lower interest rate environment.
After several years in the doldrums, the environment is starting to look a little brighter for unloved UK equities. Interest rates are due to fall, and ambitions are set on growth. This could particularly benefit smaller and medium-sized companies which like a lower interest rate environment. We think the UK offers great value, and with investment trusts trading at wide discounts, there are attractive ways for CT Global Managed Portfolio Trust to access this ripe opportunity.
UK equity investing offers good value
The performance of UK equities has languished at the bottom of international league tables for years. The repercussions of Brexit, the costly Covid pandemic and political uncertainty have created a challenging environment for the asset class. Plus, investors have been disappointed by the ‘higher for longer’ approach to combating sticky inflation. Domestic equities are trading cheaply, with historically low valuations.
But we think there’s cause for cautious optimism. The UK now has a new government focused on economic growth. The risk of recession has abated, growth is modestly picking up and inflation is heading lower. This paves the way for interest rates to fall over the next year, which would benefit equities. Further cuts may be required for sentiment to improve; however, it does appear a more favourable environment for the UK stock market. Many risks and uncertainties remain, but the economic fundamentals are becoming more favourable.
The UK offers great value too. It’s the only major equity market markedly cheaper than its long-term average (the forward price earnings ratio[1] is around 11x against a long-term average of 14x[2]). Earnings growth is picking up and a series of takeovers of UK companies shows that investors are taking advantage of these historically low valuations.
Small and mid-caps are back in favour
In times of acute uncertainty, investors tend to exhibit a preference for larger companies. The recent recessionary fears have illustrated this well; investors have flocked to large caps as bigger firms are considered better placed to survive an adverse environment of high inflation and interest rates.
Most small and mid-caps use debt to grow, so higher interest rates mean there’s a higher cost to servicing their debt, which eats into their bottom line. Historically, higher interest rates have created a challenging environment for smaller and medium-sized companies, with lower interest rates acting as a tailwind.
Given the higher interest rates we’ve had here in the UK and widespread uncertainty, a preference for large caps has been evident for the past three years. However, the tide is turning and this year, the ‘large-cap effect’ is less apparent. It’s the FTSE SmallCap which has delivered rising performance.
An environment of moderate growth and lower interest rates is favourable for small and mid-caps. Given the current UK economic environment, we think most of the companies displaying better growth prospects are to be found in the mid and small-cap sectors.
Investment trusts on wide discounts
The UK has become more investable for global and domestic investors. Small and mid-cap equities in particular look like attractive long-term prospects. It could be opportune to access the asset class through investment trusts, which remain on historically wide discounts, making them well-placed to deliver positive returns.
An investment trust is a public-listed company through which investors can access the stock market by buying shares, making them a shareholder in that trust. They are managed by a board of directors and a fund manager, who set and run the investment policy and strategy of the fund.
Investment trusts are said to trade at a premium or a discount to the value of their underlying shares, and at the moment, many are trading at a discount which could potentially offer investors good value. CT Global Managed Portfolio Trust is an investment trust, and it holds other investment trusts which cover many sectors and regions.
It's time for cautious optimism
Against a more favourable backdrop of lower interest rates, falling inflation and political stability, we believe cautious optimism for UK equity markets can be justified. The UK equity market offers good value and made some headway at the beginning of the year. We think the improving economic fundamentals mean this positive performance may continue.
Small and mid-cap firms are particularly well-placed as the cost of debt is set to fall with cuts to interest rates. CT Global Managed Portfolio Trust plans to leverage some of these overlooked opportunities for long-term growth.
Investment risks
The value of your investments and any income from them can go down as well as up and you may not get back the original amount invested. Gearing is used for investment purposes to obtain, increase or reduce exposure to an asset, index or investment. The use of gearing can enhance returns to investors in a rising market, but if the market falls the losses may be greater.
Issued by Columbia Threadneedle Management Limited and approved for distribution 21/10/24.
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