Outstanding opportunities on offer as the UK economy reopens

The UK is offering long-term investors “outstanding opportunities” to invest in smaller companies as the country lifts restrictions and continues its sharp recovery, Dan Harlow at AXA Investment Managers has said.

Having endured heavy falls last year during the pandemic when much of the UK was forced to stay indoors, the UK’s successful vaccination programme – and subsequent lifting of most restrictions in the UK – have created opportunities in sold-off, domestic-facing sectors such as retailers and leisure names.

Harlow, manager of the AXA Framlington UK Smaller Companies strategy, said the companies which have survived the headwinds of both the lockdown and the recession were now in a strong position to gain market share.

“We are optimistic about the recovery for UK domestic names as the UK economy opens up,” he said. “While some may need further support to see them through until the benefits of the unlocking are felt, there are some great opportunities out there now.

“Restrictions may be relaxed in large parts of the UK, but overseas travel restrictions in 2021 remains fairly strict with limited options for British people to spend the near £62.3bn abroad on overseas travel as seen in 2019¹ .”

Names Harlow highlights include Hollywood Bowl and Gym Group. “A lot of capacity has come out of these markets, and landlords are desperate to fill space in retail parks and beyond,” he said.

“Both Hollywood Bowl and Gym Group have raised capital, so they have money to invest in their expansion, they have a favourable backdrop, and they have seen competition vanish so there is a lot more capacity in the market.”

Harlow points out that 2020 was the ninth successive year that the MSCI UK Index delivered lower returns than the MSCI World Index² . But he says the “sharp, consumer-led UK recovery” has added to the current opportunity.

“We expect to see some FOMO – fear of missing out - now for the UK,” he said. “The market’s valuation is below others, while for small caps in particular the worries over Brexit and COVID-19 are dissipating, all of which are positives for domestic-facing UK companies.”

Harlow says the “key challenge” now is how companies manage inflation pressure, with Consumer Price Inflation hitting 2.5% in June, up from 2.1% in May – the second consecutive month the rate has been higher than the Bank of England’s 2% target.

“A number of companies are looking at ‘value engineering’ to help drive cost out of production, while the majority will look to pass higher input costs on in a timely manner,” he said. “Pricing power has always been a key focus in our investment process, and we will soon discover who is able to successfully achieve this.

“However, smaller companies generally have been particularly conservative in their earnings outlook, and we are encouraged that the mantra of ‘under promise, over deliver’ is largely being adhered to.”

All stock/company examples are for explanatory/illustrative purposes only. They should not be viewed as investment advice or a recommendation from AXA IM.