It’s Coming Home to Rome!

VT Tyndall Unconstrained UK Income Fund

It’s Coming Home to Rome!

So close and yet so far. After a fantastic European tournament where the young, exciting England football team reached their first major final for 55 years, they sadly fell just short with the, all too familiar, agony of another penalty shootout defeat. Congratulations must go to the Italian team, last beaten in an international game back in September 2018.

Nursing the inevitable hangover of disappointment, this week’s commentary will be, mercifully we are sure, light on words. As we embrace the start of the second half of 2021, we thought it would be useful to review the state of the UK economy and stock market through a number of, to us at least, interesting charts set out below.

The strength of the post pandemic economic rebound is shaping up impressively. The chart above highlights consensus forecasts of 6.7% GDP growth for 2021, up from 4.7% just 3 months ago.

The strong economic numbers bode well for the recovery in employment in the coming months, with the UK PMI employment survey, above, reaching an all-time high level last month.

UK consumers, given unprecedented support from the government, have plenty of firepower to spend as the economy gradually, fully reopens. The chart below estimates anywhere between £130bn - £185bn of excess liquid savings on UK household balance sheets.

Meanwhile, as most will be aware, the UK housing market has continued to strengthen in recent months, even allowing for some modest uncertainty around the ending of key support schemes.

Elsewhere in the economy, trade volumes with the EU appear to be recovering strongly after the initial, Brexit induced, logistical challenges as the chart below highlights.

On the pandemic front, whilst the UK is unfortunately experiencing a third wave of infections, driven by the Delta variant, the hugely successful vaccination rollout is having the intended impact where it matters most – reducing hospitalisations and deaths, as the chart below from Berenberg illustrates.

Pulling together the above, and many other data points, we remain extremely optimistic on the outlook for UK growth over the medium term. Turning to the UK stock market, we saw solid gains in the first half of 2021, even if somewhat less impressive than elsewhere, as highlighted below.

The relative underperformance of the UK to US and European equities continues a, now well-established, trend since the Brexit referendum in 2016 as can be seen below, all in US dollars.

This relative underperformance continues to leave the UK market looking extremely undervalued globally, as the chart below from Morgan Stanley Research reiterates.

The opportunity this is presenting has not been lost on the private equity industry who, at current rates of deal making, are on target for their biggest year of UK buyouts since 2007.

Notwithstanding the robust outlook for growth, receding Brexit and pandemic headwinds, and obvious valuation appeal, is the UK stock market, like the England football team, destined to continue falling short when the winning post is in sight? We don’t believe so. It may take time for investor perceptions to change but, with clouds slowly lifting, we firmly believe further attractive returns from UK equities are, most definitely, coming home.

16th July 2021
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Data source (unless otherwise stated): Bloomberg
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