It’s been a washout year for the UK and indeed the world economy. But the sentiment is turning bullish. Big bulge investment bank Goldman Sachs expects the UK economy to grow by 7.1% in 2021. This is higher than most other estimates available and good news for investors in UK shares.
Why Goldman Sachs’ forecast matters
I sat up and took notice of what Goldman is saying particularly because it is more bullish than the UK government’s prediction. However, it does seem to be in line with the optimism of banks like Morgan Stanley, Citi, and UBS, which expect UK’s equity markets to rally in 2021. I’d keep an eye out for how these forecasts develop from here, but the signs are beginning to look positive.
2 steps to investing in UK shares now
If there’s indeed consensus around a growth pick up, I’d drill down to stocks I like in two steps. First, I’d consider cyclical stocks. These are ones which do well when the economy’s booming and vice versa. Think of sectors like real estate, entertainment, hospitality, travel, and luxury.
Incidentally, many of them will also get an impetus from easing the lockdowns again. Consider instances like cinemas, restaurants and pubs, airlines and hotels that were pretty much out of business through the year.
In other words, there’s a double reason for them to perform next year.
Next, among the cyclicals I’d focus on stocks that are UK market focused. This excludes FTSE shares that have a heavy international focus. For instance, luxury brand Burberry has an appreciable China focus. Similarly, construction company CRH has a US focus. They will probably do very well too, because the world economy will pick up.
But here my focus is on those that will get a lift from the UK markets. Here are three I like:
#1. JD Sports Fashion
A significant percentage of the FTSE 100 high performer’s revenue is sourced from the UK, even while it has an international presence as well. If anyone was doubtful of its capacity to rally much further, its sharp share price increase earlier this week showed that it can bounce back.
#2. Persimmon
The FTSE 100 housebuilder has seen a consistent recovery in share price over the year since the stock market crash. It also pays a dividend and its latest trading update inspires confidence. Real estate has benefited from the stamp duty waiver, but if growth bounces back, the stock doesn’t have to slump when it resumes.
#3. Berkeley Group Holdings
Similarly, the FTSE 100 property developer BKG has also seen a pickup in share price. Its dividend yield at 4.2% is even higher than Persimmon’s, even if its share price bounce back hasn’t been as sharp.
As a bonus, here’s another share I like — London Stock Exchange Group. This one’s a no-brainer. If the UK economy and stock markets boom in 2021, the direct beneficiary is this already high-performing UK share. The only drawback is the extent to which it has run up already. I reckon it has more steam, though, going by Goldman’s predictions.