The UK stock market offers more than just commodities

According to Richard Colwell, an improvement in the situation in Europe should encourage the repatriation of capital to banks and other cyclical sectors such as autos, leisure and industrials.

The war in Ukraine has caused major upheaval in oil markets and has further put pressure on markets, writes Richard Colwell, Columbia Threadneedle Investments’ head of UK equities, in a recent market commentary. For this reason, the markets have been tense since the beginning of the year, especially for raw materials. “We do not speculate on commodity prices, but focus on sectors for which an adequate fundamental analysis is more possible.” Colwell aims to generate alpha in promising sectors through bottom-up analysis. According to him, one of these sectors is industry. “If there is a bright spot in Ukraine and the prospect of a recession in Europe recedes, capital should return to European banks and other cyclical sectors such as autos, tourism/leisure and industrials,” says Colwell.

Quantitative strategies drive growing market volatility

The list of companies that are underperforming includes many companies that have already been badly hit by the COVID-19 pandemic. According to Colwell, quantitative strategies, i.e. the “electronic placing of orders in baskets”, are responsible for the weakness in share prices despite more favorable fundamental prospects than in 2020. This has a major disadvantage: it is necessarily retrospective and the sensitivity to market movements of the last two years is clearly over affects the volatility caused by the COVID-19 pandemic,” explains Colwell. That is why quality companies are under pressure, even if they are better off today than when the pandemic began. As markets are increasingly influenced by quantitative strategies and ETF baskets, it’s important to be wary of sudden market moves, the expert said. While we see very important rotations from these basket transactions, we don’t understand a fund manager’s role to be one of anticipating market movements,” explains Colwell.

Mergers and acquisitions offer opportunities

The high level of mergers and acquisitions shows that the UK market still offers interesting opportunities. “The immense valuation arbitrage continues to attract interest from private equity funds and overseas investors. In 2021, the UK recorded 12 deals worth more than $500 million, the highest since 2007,” Colwell said. Despite the conflict in Ukraine, the investment expert still sees potential there. “For example, Pearson was the subject of a second and then a third takeover even as Russia invaded Ukraine. Even if this takeover was unsuccessful, companies listed in the UK still inspire envy.

Keeping the basics in mind is crucial

Overall, the UK market remains a reliable alternative to overvalued and crowded markets. “The proliferation of passive and quantitative strategies in recent years and the volatility of recent months have created opportunities for stock pickers and corporate shareholders.” The investment expert remains true to his strategy and will continue not to follow the momentum. “We will continue to focus on business fundamentals to deliver comfortable risk-adjusted returns,” concludes Colwell.

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