UK Green Shoots, Honestly – Up 9x The Index – Spotting Winners

Fri 24 May 2024

By Brian Dennehy

Access Level | public

Market commentary



With the UK General Election just ahead, the emphasis today is on the UK.

Since early April the much-maligned FTSE 100 has shown impressive relative strength versus the major US stock market index, the S&P 500.  Although the FTSE 100 is concentrated in global businesses, it certainly helps the mood music for the wider UK stock market (FTSE 250 and FTSE Smallcap for example) which are more domestically focused.

That revival in enthusiasm for the UK was also reflected even earlier in the FTSE 250, representing more domestically focused medium-sized businesses.  It flew out of the blocks from the low in Autumn 2023.  It was UK smaller companies which notably lagged, and until they stir it cannot be said that the UK has truly turned a corner.

This began to change from 16th April, which is very positive, and small caps are now leading the other two UK indices.  For sure this is a very short period for analysis, and there has been no single development which explains this, yet there is clear evidence of a resurrection of confidence in UK smaller companies in 2024.

Growing takeover activity is the first positive sign.  There were 39 takeovers announced in 2023, 12 in the 1st quarter of 2024, and an acceleration of this trend in the 2nd quarter, with some notable headline bids, for example for the huge Anglo American and Hargreaves Lansdown, the latter being the largest UK investment platform, who many of you will hold your investments with.

Most of the takeovers targeted smaller companies, which were particularly cheap.  Beyond the targets being cheap, the aggressors will have various reasons for their newfound confidence in the UK, and one will undoubtedly be a growing sense of stability.

One of those reasons was not an expectation that the Conservative government would survive this year’s General Election, and this was illustrated on Wednesday when markets were largely unmoved by the shambolic announcement of the Election by Rishi Sunak.  Gilts had already fallen after worse than expected inflation numbers earlier that day.

One reason was probably that financial institutions were increasingly relaxed with the idea of a Labour government (though it will be interesting to see how markets respond if a hung Parliament becomes more likely).  It was never likely that a government led by a career solicitor and an ex-Bank of England economist would scare the sheep.

As mentioned in the 22nd March Friday Note, Rachel Reeves has been doing the rounds with major financial institutions and fund managers for some time, and from those we have spoken to they appear to like what they heard from the Shadow Chancellor.  According to Gresham House “there is a huge appetite for UK listed businesses”.  With their background Gresham would say that, yet the evidence is clear and growing that funds invested into small and medium-sized UK businesses should be on your “buy” list.

On which point, do use our Best Funds By Sector tool to identify the winning UK funds right now, and remember if you like Investment Trusts to use the “Combined Universe”.

In addition look at our Dynamic UK Blended Portfolio.  This has a superb long term track record, up 9x the index since inception in May 2000 – is there a more compelling reason to sidestep index trackers, and their disciples, The Guardians Of Mediocrity?  No sophistry here, it couldn’t be a simpler process to build a winning portfolio, supported by a depth and breadth of research stretching back many decades, and which we conveniently set out in The History Of Momentum Investing – Two Centuries Of Pedigree.

Do remember, these tools are FREE to use, and our research is free for all to read.

Returning to the election, history tells us that we should expect sharp falls when the prospect is a Left-leaning Government, as we highlighted here.  That hasn’t happened on this occasion, as we anticipated it wouldn’t in the last few months.  An incoming Labour government has arguably been priced into markets for many months now.

For example, over the last week the small cap index is slightly up.  The FTSE 100 is down 1.4%, but the Dow Jones and very large cap Chinese indices are down more e.g. FTSE China 50 minus 5.7%.

There isn’t enough space or time this week to chat about the fascinating Nvidia results, perhaps next week.  But having painted a colourful picture for UK prospects above, I am wary that yesterday the S&P 500 index, the most relevant US measure, was less than 0.5% of our previously calculated upside target of 5361.  Today the technical picture for this index implies it will go clean through that level in the week or two ahead.  Nonetheless, we remain on guard.


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