Three solid stocks to ride the UK’s rapid recovery

Even before the Covid-19 pandemic struck, the UK had lagged behind the global economy for several years. Arguably, this was largely due to a lack of productivity growth as a result of companies' low capital expenditure.

Moreover, the Brexit-induced uncertainty meant that projects companies may have had in the pipeline were put on hold. Then, when Covid arrived and rapidly spread throughout the country, the British economy contracted faster than its major counterparts.

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It is usually in difficult periods that companies focus on costs and become leaner as organisations. Then, when sales pick up, operating margins can expand substantially. With the return of pricing and output growth, we expect capital expenditure to pick up, further supporting the UK’s economic recovery.

Seek out stocks of all sizes

Our approach focuses on a diversified portfolio of UK companies across the market-cap spectrum to achieve both income and capital growth over the medium to long term. As the economy continues to reopen and lockdown restrictions are eased further, we believe this presents an interesting opportunity to be invested in a broad selection of UK companies.

One such opportunity we have added to the portfolio is Headlam (LSE: HEAD), the leader in the distribution of floor-coverings in the UK. The company’s sales to residential customers are already running ahead of 2019 levels, reflecting the savings that households have built up during the pandemic and want to invest in their homes. The recovery in sales also comes at a time when management have taken substantial costs out of the business, including consolidating the delivery network and the distribution centres.

Companies that have successfully worked at product development are also benefiting from an increase in demand. One example is Morgan Advanced Materials (LSE: MGAM). It services a wide range of markets with the specialist materials (including carbon and advanced ceramics), including healthcare, semiconductors and renewable energy. Over the last year, the company has reduced its debt and increased its productivity, and we believe this provides a bright outlook.

The best of the banks

It is not only in manufactured goods that we think there are opportunities. In our view, the positive economic backdrop should also benefit financials such as Barclays (LSE: BARC) bank. The company has a low valuation and a growing economy should be a beneficial environment for it. In addition, the provisions the group has made for bad debts were made at a time of real concerns about the UK’s outlook and therefore should not be fully needed, in our view.

We believe the strength of profit growth could surprise investors across a wide range of companies. Incidentally, it is the cash generated by these profits that helps pay dividends and the improved outlook for payouts is arguably the key to growing confidence among investors.

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James Henderson is fund manager at Henderson UK Equity Income fund.