ICAGY International Consolidated Airlines Group SA (PK)

By David Ricketts

Of Financial News

The spread of the Delta variant of Covid-19 sparked stock market tumbles on Monday, while the pound posted a five-month low against the dollar. But fund managers are convinced that the U.K.'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 hasn't 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."

Mr. 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 PLC and Young & Co's Brewery PLC could be in play, due to their high quality freehold estates in prime London and Southern locations.

"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 slumped 2.3% Monday, leasing a broader market selloff in the U.S., where benchmarks had their worst day since May. Companies that contributed to the U.K. stock market downtrend were those in the travel and leisure industries, including British Airways owner International Consolidated Airlines Group S.A., which plummeted 5%.

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

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

"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 850 million pound ($1.16 billion) Blue Whale Growth Fund which has a large allocation to U.S. stocks.

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

Mr. 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 U.K. share price falls were a sign that investors think the "reopening trade is now a dud."

"Many of the stocks leading the U.K. 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 Mr. Mould.

Neil Ferguson, a government adviser and professor at Imperial College London, told the BBC on Sunday that lifting Covid restrictions in England would "almost certainly" lead to the U.K. 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."

Alex Wright, manager of the GBP3 billion Fidelity Special Situations fund, said the outlook for U.K. equities "looks bright."

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

Mr. 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 overcapitalized, with NatWest Group PLC 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 U.K. government. An improving competitive landscape in Ireland has also led us to add to our banking exposure there."

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

Website: www.fnlondon.com

(END) Dow Jones Newswires

July 20, 2021 06:58 ET (10:58 GMT)

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