A close look at the figures reveals that since 2010, our list has returned 275% against a Small Companies index that recorded a rise of 212%. That's an outperformance of 63%. There's more good news. Over the same time period, our conviction list has outperformed the UK market in 11 of the 20 periods.
Outlook for UK Equities
We’ve seen some compelling political theatre recently including the triggering of Article 50. Nevertheless, the UK economy has held up since the vote for Brexit. Over the next quarter, we expect this trend to continue thanks to fiscal and monetary loosening, a devalued exchange rate and accelerating global growth.
Regardless, the situation cannot continue forever. There’s a lot to consider, not least a contraction in real wage growth and the fact that saving levels are at historic lows.
Back at the start of Q4 2016 and throughout Q1 2017, we advocated an overweight position on UK cyclical equities. We were vindicated when, over this six month period, this trade returned 15.7%. Meanwhile, at the same time UK sensitive stocks returned 12.5% and UK defensives just 6.2%.
Now, however, a different picture is emerging. Equity valuations have rallied ahead of earnings for a number of reasons, including the expectation of a US-led cycle of financial deregulation as well as a one-off currency tailwind from the sharp fall in the value of Sterling. So, as far as our outlook for UK equities is concerned, we have downgraded our stance to an equal weight position. Having said that, there is still a widespread appetite for yield.
The UK and Global Economy
We remain positive on the prospects for the UK economy and expect it to grow by 1.8% in 2017. While we do face the dual challenge of Brexit and higher inflation, we believe this represents a steady headwind to activity rather than an acute challenge to UK output growth.
For the first time in eight years, fiscal and monetary policy are loosening and there’s a stimulative exchange rate. But structural growth faces significant challenges, not least housing market inefficiencies and a poor productivity record, although these challenges are on hold as the government seeks short-term economic momentum ahead of the UK leaving the EU.
The odds are in favour of the US Federal Reserve hiking interest rates this year, and there are signs that it may be considering shrinking the balance sheet. But huge uncertainties remain when it comes to US fiscal policy so we expect the Federal Open Market Committee to remain cautious.
Conviction List Rules
We monitor our Conviction List closely, reviewing it every quarter to ensure that every stock continues to justify its place. We have no compunction in removing stocks if the Buy or Sell case has altered significantly. And compelling Buy or Sell cases will be selectively added if we deem it prudent to do so.
While there is no set number of selections, between 10 and 15 stocks is typical. In addition, each stock selection must have a minimum market capitalization of £125m.