The UK has been plagued by political and economic instability in recent months, but as the investment environment undergoes a fundamental transition, investors are seeing an opportunity. The composition of the UK’s FTSE 100 differs significantly from that of many major developed markets, in that it is heavily weighted towards consumer staples, financials and materials, but contains very few focused sectors. on growth, such as technology, which have benefited from the era of ultra-low interest rates. Global financial markets have endured a brutal year against the backdrop of Russia’s war in Ukraine and the aftermath of Covid-19, including supply bottlenecks related to ongoing lockdowns in China. Aggressive monetary policy tightening by central banks to rein in soaring inflation hurt risky assets. In a press briefing last Tuesday, GAM chief investment officer David Dowsett said that beyond the plethora of external shocks, markets were experiencing a normalization of interest rates after around 15 years of rates. ultra low in the world. He added that this period of monetary policy is over. and that we are heading for a “structurally different” interest rate environment for the foreseeable future, primarily because “the era of globalization has definitely come to an end” in light of the global supply chain issues caused by Covid-19 lockdowns in China and Russia exclusion. “We’re going back to an investment environment where not everything is going to pay you back and not everything is going to make a good return on capital, because capital actually costs something,” Dowsett said, adding that liquidity is now a concern. for investors rather than capital appreciation at all costs. He argued that in a more uncertain investment landscape, investors should seek assets that produce income, which is where UK equities, which tend to generate consistent dividends, are coming back “in fashion” after many years in the desert. Adrian Gosden, manager of the GAM UK Equity Income Fund, highlighted six FTSE 100 stocks – all held by the fund – with dividend yields between 5% and 7% that are trading at particularly low valuations. These were BT Group, Barclays, GSK, Lloyds, Imperial Brands and BP, all of which trade at price-earnings ratios – a measure of the company’s share price relative to its earnings per share, used to determine whether it is overvalued or undervalued. – between five and nine. “If you are on a P/E of five and offer a dividend yield of 5%, and the P/E goes to a P/E of six, with that dividend you will return 25% to your investors,” said Gosden said. said. “My point is that the UK has put itself in a position, for many different reasons, where it’s sitting there in absolute terms… We’re moving forward in an environment where we have inflation, which we haven’t had since the financial crisis of 2008, and in that environment the income from UK equities has proven itself.” These attractive valuations for UK equities were also identified in a note last week by BlackRock Fundamental Equities. Portfolio managers Adam Avigdori and Oliver Dixon also cited increased share buybacks and attractive dividends boosting the country’s stocks on a total return basis, while a weak pound also provides a cushion against recession. companies whose profits are based on the dollar. “Not only has the UK discount widened to a level not seen since 2008, but companies are buying up record amounts of their own shares. This tells us that management teams have confidence in their own companies and believe that their stocks became undervalued,” Avigdori said. and Dixon said. “The £51bn ($58.3bn) of share buybacks recorded so far in 2022 equates to a buyback yield of nearly 3% on the FTSE 100, according to our calculations. added to a dividend yield of 4.5% – the highest among developed markets, according to JP Morgan – the combined income totals more than 7%.This compares to the current yield on UK 10-year gilts of around 4%. BlackRock also recommended investors seek selective opportunities in healthcare, homebuilders and certain areas of retail.GAM’s “octane” Gosden argued that with the majority of bad news for the economy UK market in the country’s markets, a slight positive shift in news flow could mean that small- and mid-cap stocks are offering an “octane” for investors.Small- and mid-cap stocks have been b much harder hit during this year’s downturn than major blue chip indices, with the FTSE 250 down more than 20% year-to-date on Tuesday, compared to a drop of just over 1% for the FTSE 100. Gosden suggested that this was solely due to the fall in the pound, since the mid-cap index is more domestically focused, unlike the FTSE 100, which is heavily export-focused. look a bit pedestrian, and it will happen if things don’t quite go that way [bad]GAM holds around 50% of its UK equity income portfolio in small- and mid-cap stocks, with a focus on companies with strong competitive moats. opportunity in small- and mid-caps was also highlighted in a note last week by Abby Glennie, deputy director of small businesses at Abrn, who said some companies may still be able to grow successfully as consumers are forced to cut their costs, especially in food and energy. , is likely to maintain its loyal fan base and could attract new customers in a downturn, by offering food at an affordable price compared (to) d ‘other retailers,” Glennie said. Glennie also identified furniture company Dunelm as being able to weather the pressures of the recession, based on its g range of pricing pressures and its non-seasonal product offerings, which means inventory can be managed if demand declines. Rising mortgage rates in the UK are already hitting the housing market, and Glennie suggested demand at the more affordable end of the market can benefit. She highlighted home builder MJ Gleeson, who believes owning one of his properties is cheaper than renting, and offers the benefit of construction equity.