Rathbones Asset Management Fund Managers eye Budget as UK Mid-Cap game-changer

The forthcoming UK Budget, due on 26 November, could be the market’s “next catalyst”, potentially unlocking value in overlooked UK equities, according to Rathbones Asset Management (RAM) fund managers, speaking this week at the inaugural Rathbones Asset Management Investor Morning, held for clients at Rathbones’ London office.  

Other RAM fund managers are weighing stretched valuations, narrow leadership and shifting macro trends, they said.

Looking at the UK market ahead of the crunch Budget announcement later this month, Alexandra Jackson, Fund Manager of the Rathbone UK Opportunities Fund said: “UK markets have delivered standout performance over the past year, led by large-caps riding a wave of passive-driven liquidity. But mid-caps are poised for a catch-up, and providing it helps cool inflation, the upcoming UK Budget could be the catalyst they’ve been waiting for. For investors looking to diversify away from the US, the UK might just be the opportunity they haven’t missed yet.”

Alan Dobbie, Fund Manager of the Rathbone Income Fund, agreed: “The FTSE All Share is up 21% over the past year, outpacing the S&P’s 12%. If this momentum holds, it could be the strongest year since the millennium, aside from 2009’s rebound. Yet this quiet outperformance has been largely overlooked, overshadowed by the US AI frenzy. We’ve been taking profits from larger-cap holdings and rotating into smaller FTSE 100 and FTSE 250 names, with the upcoming Budget potentially acting as a ‘clearing event’ for the UK.”

In global equity markets James Thomson, Fund Manager of the Rathbone Global Opportunities Fund, said: “We see risks lurking beneath a market that’s become a one-trick pony, dominated by big tech and AI. Nearly 43% of the US market now claims an AI link — but some of that could be a wolf in sheep’s clothing. While circumstances are quite different and this isn’t a repeat of the dot-com bubble, risks come when growth is very concentrated. We think the bull market is intact but setbacks are a normal feature that shouldn’t be feared, but capitalised on, as we journey to wider participation through the entire stock market.”

Attention shifted to emerging markets as Tim Love, Head of Global Emerging Market Equities and Joaquim Nogueira, Fund Manager, commented: “Selected emerging market equities offer compelling risk-adjusted returns at fair value, unlike the stretched valuations seen in some developed markets. Active management is essential. Several global forces are converging to support emerging market equity ratings, including liquidity tailwinds, attractive relative valuations, and improving domestic credit growth. Add to that strong bottom-up fundamentals and timely cyclical entry points, and we believe there’s no shortage of alpha in emerging market equities. In our view, the opportunity still has room to run, and with its diversity, the asset class offers ways to sidestep geopolitical risks through relative safe havens such as Emerging Europe, Mexico, and the Middle-East, while drawing in both global and domestic investors.”

In a discussion on Asia ex-Japan, Dr Lisa Lim, Head of Asia ex-Japan Equities, commented: “Asian companies have moved-on from being imitators to genuine global innovation leaders. Long-term investment in education, research and technology is now bearing fruit, driven by growing domestic demand and an expanding middle class. We see huge opportunities in innovative companies in the region while remaining alert to potential risks.”

Active engagement was the focus for David Harrison, Fund Manager and Head of Sustainability, and Engagement Analyst Jenny Twigg, who emphasised the importance of an active approach to responsible investment. Twigg commented: “We believe that actively managing sustainability risks can drive performance. In particular, while we aim to be constructive with management, we have a unique escalation framework for engagement, with strong sanctions including reducing positions or divesting where we no longer have confidence in the sustainable management of the business.” They discussed the firm’s progress in earning six Sustainability Disclosure Requirement (SDR) labels with David Harrison commenting: “As time goes on, we believe that these SDR labels will provide investors with a much clearer view of the sustainability approaches of different funds.”

Bryn Jones, Head of Fixed Income said: “Post-pandemic growth has leaned on three pillars — excess savings, low unemployment and rising wages. Those supports are now slipping away: savings are running down, joblessness is edging higher and wage growth is fading. In this environment, investors are seeking more defensive assets, and active fixed income has a clear role to play.”

Stuart Chilvers, Fixed Income Fund Manager added: “Markets are only pricing in a little over two rate cuts over the next year, which we think underestimates what the inflation and employment outlook could allow for. Ahead of the Budget, we think bond markets will be keen to see spending restraint as well as tax rises, and will want the Chancellor to rebuild fiscal headroom — ideally closer to £20 billion rather than the £10 billion we have seen recently.”