The more positive stance on the UK economy taken by the Bank of England in its last meeting has consolidated JP Morgan’s James Davidson view of being overweight UK assets.
The fund manager says he will maintain UK equities positions at around 15 per cent of his £72m JPMorgan Global Equity Income fund because last week’s better-than-expected outlook from the Bank of England confirmed the UK economy will manage to offset major disruption from Brexit.
Davidson’s exposure to the UK is much higher than the MSCI World, his fund’s benchmark, which is usually 6 per cent.
He says: “While UK equities from overseas companies have done best since the vote, if you see what’s working today and perhaps from a very low base are the more domestically-focused companies doing better than the international ones.
“All this began when Carney said he’ll stay at the Bank of England till 2019 which gives some continuity,” Davidson says.
Specifically, Davidson expanded the holding in Direct Line, WPP and Persimmon, which all saw significant losses after the Brexit vote.
Since then, these stocks are up 10 per cent, 19 per cent and 34 per cent respectively in total return terms, he notes.
Last week, the Bank of England almost doubled its economic growth forecast for 2017, changing its outlook from its gloomy August forecast when it cut interest rates to 0.25 per cent in response to the Brexit vote. It also hinted it may not cut interest rates further before the year’s end.
In the its November inflation report, the Bank increased its 2017 economic growth forecast to 1.4 per cent, up from 0.8 per cent it had in August.
The bank also upped its forecast for GDP growth in 2016 by 0.2 per cent to 2.2 per cent.
As many commentators have suggested, the Bank might have exaggerated their negative growth projection in the aftermath of the EU referendum in June, with the consequent cut of the interest rates at 0.25 per cent.
Davidson says: “The response of the Bank on cutting rates post-Brexit was unnecessary. If you look at what has happened after the vote, growth came back quite quickly so I think that going back to the financial crisis the banks were probably repaired by then and didn’t necessarily need that extra stimulus.
“We are definitely not worried about deflation anymore. If the Bank are right about their new inflation forecast, then perhaps the UK has got away with it.”