Stock picking fund managers see bargains as markets digest ‘living with Covid’

The spread of the Delta variant of Covid-19 sparked stock market tumbles on 19 July — while the pound posted a five-month low against the dollar. But fund managers are convinced that the UK’s FTSE 100 index, as well as several smaller companies, pose longer-term investment opportunities.

“If the market decides to put a negative spin onto the rising case numbers, that could create buying opportunities,” said Steve Clayton, head of equity funds at Hargreaves Lansdown.

“I suspect what has not happened yet is the emergence of a general understanding that any reopening will have significant human costs as rapidly transmissible variants find their way to the vulnerable. That is ultimately what ‘living with Covid’ means.”

Clayton said that if there were a significant pull-back by the market in response to rising infections, smaller hospitality names like Fuller Smith & Turner and Young and Co’s Brewery could be in play, due to their high quality freehold estates in prime London and Southern locations.

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“In the long run, we see those prime pub assets as only going up in value, even if the short term is highly unpredictable,” he said.

The FTSE 100 on 19 July slumped 2.3%, leasing a broader market selloff in the US, where benchmarks had their worst day since May. Companies that contributed to the UK stock market downtrend were those in the travel and leisure industries, including British Airways owner IAG, which plummeted 5%.

Cineworld and cruise operator Carnival also posted falls, dropping 10% and 8% respectively.

US stocks also suffered a drop, with the S&P 500 falling by more than 2% on 19 July.

“Investors often flock to companies with positive free cash flows and net cash on the balance sheet,” when markets wobble, said Stephen Yiu, lead manager of the £850m Blue Whale Growth Fund which has a large allocation to US stocks.

He said his firm’s portfolio, which has allocations to Alphabet, Mastercard and Visa, is “positioned on the right side of structural drivers like digital transformation and digital payments.”

Yiu added: “These companies have both greater resilience and growth prospects than the rest of the market so if they experience a similar sell-off then that presents an opportunity.”

Russ Mould, investment director at online investment platform AJ Bell, said UK share price falls were a sign that investors think the “reopening trade is now a dud”.

“Many of the stocks leading the UK stock market downwards are related to travel and leisure, suggesting that investors are extremely worried that we’ve lifted restrictions too soon and that another lockdown could be a month or two round the corner,” said Mould.

Neil Ferguson, a government adviser and professor at Imperial College London, told the BBC on 18 July that lifting Covid restrictions in England would “almost certainly” lead to the UK recording in the region of 100,000 new Covid cases a day, with the potential for that figure to double.

However, Nick Burchett, director of investments at Stonehage Fleming and co-manager of the TM Stonehage Fleming Opportunities Fund, said: “Markets and companies might get a few problems or setbacks along the way, but these could throw up opportunities for stock pickers like us.”

READ HSBC to reopen all offices in England from 19 July as banks ramp up return

Alex Wright, manager of the £3bn Fidelity Special Situations fund, said the outlook for UK equities “looks bright”.

UK companies are trading above pre-pandemic levels, but they remain cheaper compared to other regions, he said.

Wright is particularly bullish on value stocks — those companies investors believe are undervalued relative to their earnings and growth potential — and has added bank stocks to his portfolio in recent months.

“The continued very strong credit performance also makes the banks’ balance sheets look extremely overcapitalised, with NatWest being the first to be able to start returning this capital,” he said.

“The bank has already recently used some of the excess capital to buy back shares from the UK government. An improving competitive landscape in Ireland has also led us to add to our banking exposure there.”

Elsewhere, Wright said his funds had added to travel and leisure-related names, but he remains “relatively cautious” on the sectors.

To contact the author of this story with feedback or news, email David Ricketts

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