Where is the best area to invest in the UK?

So, this is a really interesting thing to think about. It’s become increasingly challenging in our view for investors to allocate fresh money to US markets due to that valuation premium versus the UK and Europe. So it makes sense we’re starting to see flows returning, but are investors likely to trim their Nvidia, their Microsoft, in order to buy a UK-listed tobacco company, a coal miner, even if they are record cheap?

For us, the value right now lies in high quality mid-caps, and they’re also cheap. We see how highly investors value innovation, top-line growth, capital-light models, free cash flow buybacks. These are some of the factors common to the top performing shares, and so we look to replicate those in our own stock picks and we’re used to having to pay a premium to access those factors. But thanks to the rate-led sell off, mid caps are now trading on just 10.8 times, barely a whisker above large caps on 10.3 times.

We estimate the discount of UK companies to US companies – even if you control for the different sector skews – at almost 30%. These assets are cheap compared to history. They’re cheap compared to other markets, and they’re reasonable even against other asset classes.

Thinking about sectors, again, I want to be in some of the areas which were hardest hit by rate rises. They could be the biggest beneficiaries as rates roll over. Real estate looks interesting. We have a big allocation in the fund, but again, I want to be in those names that have fixed their debt cost already, those that are in structurally-growing, end markets. Private rental developer Grainger [Plc] stands out. They fixed their debt cost at 3%. They have the funding to develop new sites and rental growth is strong.