The UK economy grew just 0.1% in the first quarter of this year, below expectations and down from the 0.4% in the final quarter of 2017.
However, given the extent of the pessimism, Paterson believes the sector has become a contrarian play.
“Negative sentiment towards the UK equity market appears to be prevailing, with most reports suggesting it’s a consensus ‘short’ position.
“However, we think on the contrary,” he said.
“Severe weather around the start of March made the economy look a bit fragile in the first quarter, but we suspect growth will reaccelerate from here as confidence picks up and some pent-up business investment is approved.”
Smooth separation
Paterson expects the Bank of England to continue with a gradual path of interest rate rises as a result, with one hike expected in 2018 as inflation continues to fall back toward the 2% target and the import price effect from last year’s sterling depreciation fades.
He also noted that while political risk may lead to further volatility in the UK, the recent deal struck with the European Union to secure existing trading rules during a transitional period means, in the long term, a recovery is likely.
“The UK conceded ground to the EU in Brexit negotiations,” Paterson said. “But a deal on a transitional arrangement to smooth the UK separation from the European Union has been struck, securing existing trading rules for an additional 21 months with businesses now able to operate ‘as normal’ until December 2020.
“Political risk may lead to further volatility in the short to medium term, but in the longer term a recovery is likely in unloved domestic stocks and mergers and acquisitions should increase as some highly valued champions become takeover targets due to sterling weakness.”
