UK stock market review – market resilient as hopes of a rate peak grow

As expectations of tough times ahead for the UK economy linger, last month the Bank of England (BoE) held the base interest rate at 5.25% – the highest level for 15 years.

This was the first time since December 2021 that the BoE’s monetary policy committee, who meet eight times a year, chose to hold rates rather than hiking them. This has raised hopes that we are at or very near the peak, although big cuts aren’t predicted any time soon.

Why do rising interest rates work on a time lag?

Raising interest rates generally makes it more expensive to borrow money, meaning people have less to spend, reducing demand and inflation. However, the effect works on a time lag rather than having the full effect right away.

Take the housing market as an example. There are lots more consumers in the UK on fixed-rate mortgages than there are on tracker or variable-rate mortgages. This means that those consumers on fixed-rate mortgages only feel the effects when they roll off the fixed-term period and look to remortgage, at a higher rate than before.

This means the lagged impact of much higher rates than we’ve been used to in recent years will carry on impacting consumers and businesses, even if inflation edges closer to the 2% target. This is likely to dampen growth and economic activity. It’s also partly why the International Monetary Fund (IMF) expects the UK economy to grow by just 0.6% in 2024, down from the 4.3% expansion in 2022.

If high rates are bad for stock markets, how is the FTSE faring?

The UK stock market was one of the better performers across global markets in the third quarter of 2023, rising by 1.88%. This was led by larger companies. Energy and basic materials companies, which make up just shy of 20% of the FTSE All-Share, benefitted from a higher oil price and a weaker pound.

The UK has had a long reputation as a happy hunting ground for income investors. The dividend yields on offer in the UK have historically exceeded other developed markets, and currently stands at 3.80% on the FTSE 100. Remember all dividends are variable and not a reliable indicator of future income.

FTSE 100 companies are expected to pay out £78.7bn to investors in 2023, slightly higher than the £76.1bn figure for 2022 which excludes special dividends. When considered alongside sizeable share buyback plans announced by UK listed companies, we think there’s value on offer, but remember there are no guarantees.

The UK’s home to some exceptional fund managers with great track records of adding value. We’ve selected those we think have the greatest long-term performance potential on our Wealth Shortlist.

How have our Wealth Shortlist funds performed?

Our Wealth Shortlist selections delivered mixed performance over the past year, and we usually expect this from what is a wide range of funds.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.

For more details on each fund and its risks, see the links to their factsheets and key investor information below. Past performance isn't a guide to the future. Investments and any income they produce can fall as well as rise in value, so you could get back less than you put in.

UK Growth

The best performing fund in the UK Growth section of the Wealth Shortlist over the past year was the Legal & General UK 100 index.

The fund invests in the 100 largest companies in the UK stock market and takes a full replication approach. That means investing in every company in the index and in the same proportion.

Given L&G’s experience and expertise running index tracker funds, we expect the fund to continue to track the index closely in the future. Of course there are no guarantees though.

Ninety One UK Sustainable Equity was the weakest performer of our selections in the UK Growth sector of the Wealth Shortlist. It gained 4.62%*, but still lagged behind the FTSE All-Share.

This fund appears in the Responsible Wealth Shortlist selection and the nature of the fund's sustainable approach means we expect it to perform differently to the broader UK stock market, and its peers in the IA UK All Companies sector.

Past performance isn't a guide to the future. Source: *Lipper IM 30/09/2023. **N/A - Full year performance data for the Ninety One UK Sustainable Equity Fund is unavailable due to the fund launching in December 2018.

More about Legal & General UK 100 Index, including charges

Legal & General UK 100 Index Key Investor Information

More about Ninety One UK Sustainable Equity, including charges

Ninety One UK Sustainable Equity Key Investor Information

UK Equity Income

The best performing fund of our UK Equity Income selections over the last year was the Janus Henderson UK Responsible Income fund, managed by Andrew Jones. The fund returned 16.87%* over the year, 3.03% ahead of the FTSE All-Share, which rose by 13.84%.

This is an exclusion-based fund which avoids areas like tobacco, alcohol and oil & gas. The fund appears in the Responsible Wealth Shortlist selection. It could help offer some diversification to a traditional equity income portfolio.

Our worst performing UK Equity Income selection over this period was the Troy Trojan Income fund, managed by Blake Hutchins. The fund did rise in value, but lagged the FTSE All-Share return by 6.98%.

Though this is disappointing, we think the fund has significant investments in companies that aren’t as reliant on a strong economy to thrive. So we expect the fund to hold up better than the index in falling markets, but to lose ground in a rising market.

Past performance isn't a guide to the future. Source: *Lipper IM 30/09/2023.

More about Janus Henderson UK Responsible Income, including charges

Janus Henderson UK Responsible Income Key Investor Information

More about Troy Trojan Income, including charges

Troy Trojan Income Key Investor Information

UK Small and Medium-sized companies

The strongest performer in the UK Small and Medium-sized section of the Wealth Shortlist over the past year was the FTF Martin Currie UK Mid Cap fund. It returned 15.81%*, outpacing the FTSE 250 ex Investment Trusts index.

The managers invest in medium-sized companies within the FTSE 250, often considered the ‘sweet spot’ between company growth potential and maturity. Richard Bullas is an experienced small and medium-sized company investor, and he has the support of a team we rate highly.

Investors should note the fund invests in smaller companies, which adds risk.

The WS Amati UK Smaller Companies fund had a testing year, losing 5.41%*, and was the weakest performer of our Wealth Shortlist selections in this sector.

The fund’s exposure to higher risk smaller growth businesses has hurt performance in a rising interest rate environment. We think lead manager Paul Jourdan is a talented and experienced smaller companies’ investor with the potential to deliver attractive returns over the long term.

Past performance isn't a guide to the future. Source: *Lipper IM 30/09/2023.

More about FTF Martin Currie UK Mid Cap, including charges

FTF Martin Currie UK Mid Cap Key Investor Information

More about WS Amati UK Listed Smaller Companies, including charges

WS Amati UK Listed Smaller Companies Key Investor Information

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