Managers of the London-listed investment trust, which has 52 holdings in firms ranging from Michelin to Whitbread, argue that there are plenty of reasons for holding UK stocks and that some of the depressing vibe around the UK economy is exaggerated.

Much of the media and political noise around the UK economy is downbeat and the gloom is overdone – this prevents investors from grasping opportunities, managers of UK-listed The Merchants Trust say.

There are plenty of chances to buy UK businesses at attractive valuations; this is a market where a significant chunk of corporate earnings is sourced from outside the country. Recent economic growth figures, while hardly stellar, show that gross domestic product could be on track to expand 1.2 per cent in 2025, based on consensus forecasts, journalists were told by the trust at a recent presentation. The trust’s manager is Allianz Global Investors.

The UK has its problems – high public debt, poor productivity, sticky inflation and hesitant consumers. However, in none of these respects is the UK worse than its European peers, Richard Knight, portfolio managers, said.

“We are overweight domestics [firms] and that is where we see the most compelling opportunities,” Knight said. 

There are uncertainties, and there has been a structural outflow of institutional money from domestic equities, such as pension funds, he said. (It was pointed out during questions from journalists that a reason for this outflow is that final salary/defined benefit pension schemes are maturing and they are not the natural buyers of UK stocks and bonds that they were decades ago.)

The relentless speculation about what UK Chancellor of the Exchequer Rachel Reeves will do to fill a multi-billion black hole in public finances has tended to dominate sentiment in recent weeks. (As of the time of going to press, the ruling Labour Party is holding its annual party conference in Liverpool. The party is currently faring poorly in public opinion polls.)

In relative terms, the UK is cheap, with shares trading around 12.5 times earnings, cyclically adjusted. Share buybacks and M&A activity is also supportive for shares, Allianz Global Investors said.

The trust, which boasts 43 years of dividend growth – and is fully covered by earnings – has chalked up market-beating performance, or “alpha,” of around 1.4 per cent per annum on a rolling five year-basis over a trailing 15-year period. The trust, which has 52 holdings, has added 12 and sold 12 firms in the 12 months to the end of July this year; annual fund turnover is just shy of 30 per cent. The trust has added stakes in companies including Burberry, Serco, Barratt Redrow, RS Group, Harbour Energy, and Sirius Real Estate. Sales include shares in Drax, Imperial Brand, Tesco, Haleon, Bank of Ireland, Next, and WPP.

Out of its top 20 holdings, British-American Tobacco is top, at 4.83 per cent, followed by GSK, at 4.74 per cent. Industrial goods and services is the most “overweight” sector holding of the fund. 55.3 per cent of the fund is in FTSE 100 stocks, followed by 32 per cent in the FTSE 250 index, with the remainder in small caps, some non-UK stocks, and cash. The trust's shares are at slightly more than a 5 per cent discount to its net asset value. It employs gearing – the cost of debt is 5.2 per cent, falling from 8.5 per cent in 2017.

Elsewhere, the Allianz GI team noted that for the first time in 20 years, yields on mid-cap UK stocks are higher than for the FTSE 100 blue-chip constituents, showing that mid-caps offer attractive valuations, and yet mid-caps historically have delivered superior growth.