Sustainable brands are becoming a lot more popular in recent years. This has led to a huge number of green companies that are publicly traded. As a result, the market for green stocks is also exploding. This trend isn’t just happening in the United States, but in the United Kingdom and other countries as well.
We talked about some of the merits of investing in green stocks last month. We wanted to talk about some of the benefits of investing in green stocks in the U.K. as well.
The Booming Market for Green Stocks in the U.K.
The UK is one of the world’s largest economies. It also has one of the largest stock exchanges outside of the US. This makes its money markets more dynamic and transparent, which means that the level of risk involved is lower compared to investing in highly illiquid markets. This is true for a lot of green stocks, as well as their less eco-friendly counterparts.
This also makes it more difficult to find undervalued green stocks because most of the actionable information is available to all investors. As such, getting an expert with experience in identifying value stocks could be the ideal option. This can be done by investing via mutual funds or investment trust funds.
It is easy to see major progress in the market for green stocks. In 2006, The Guardian published an article in partnership with Shell saying that green investors have never had it so good. However, there are a lot of indicators that the market for green financial assets is better today than ever.
The UK economic growth amid the pandemic increases demand for green stocks
The UK economy is expected to grow at an annual rate of about 4.5%, which is a downward revision from the previously predicted growth rate of 5.9%. The International Monetary Fund (IMF) attributed their downward revision of the UK’s economic expansion to the adverse effects of the new strain of covid-19.
Nonetheless, a 4.5% growth is massive for a developed country. Normally, this level of growth is common in emerging markets and developing countries. Therefore, this creates a unique investment opportunity for investors looking for stocks in highly liquid markets with promising growth.
This is expected to drive a significant rebound in stock prices following the covid-19 stock crash of last year. The UK is one of the leading countries in terms of covid vaccine inoculations and this could help stimulate economic growth as more businesses resume operations.
Green companies are likely to benefit from this newfound momentum. They may actually outperform the market, since the pandemic has made people more concerned about sustainability.
Green stocks that offer potentially high returns
It is highly expected that the UK stock market will go on a major bull-run once the covid menace is mitigated. As such, a significant rebound is expected across all sectors. However, those that focus on small and medium-sized companies could benefit more due to the potential impact on prices of green stocks compared to mega-cap multinational corporations.
What may be a marginal bump in stock price for a mega-cap stock could be a windfall for a smaller company. That is why most of the companies that experience aggressive growth are small in market value. But these stocks can also be deceiving at times. There are cases where they have ended up being catastrophic value traps that led to substantial financial losses for investors.
Therefore, cherry-picking them is a tricky affair. This is where the need for an expert investor comes in. In this respect, investment trusts and mutual funds come to mind. Green investors can benefit from the profit potential offered by these stocks by investing through a mutual fund or an investment trust that focuses on small and medium-sized companies. They need to consider the same fundamentals that would drive investors that were buying stocks that weren’t so environmentally friendly.
In the UK, Lowland Investment Company Plc (LON:LWI) an investment trust under Janus Henderson Group Plc comes to mind. This fund focuses on rewarding investors with both capital and income over the medium to long-term. The investment trust targets to deliver higher than average returns to investors by investing in a well-diversified portfolio of predominantly small and medium-sized UK companies. This makes it a good candidate for value investing in the UK as it combines aggressive growth with well-diversified risk exposure. Based on the company’s latest portfolio updates, Lowland Investment Co. Plc has more than 50% invested in high growth UK stocks.
The trust has gained nearly 50% since bottoming in March following the February-March covid-driven plunge. However, it is still more than 23% below its pre-pandemic highs achieved at the start of last year. This means that the fund has a lot of room to run should the recovery continue in 2021.
The pandemic appears to have pushed asset values significantly lower which suggests that now could be the time to pounce before the market spikes again.
The U.K. Offers Promise for Green Stock Investors
In summary, the UK is one of the most liquid markets when it comes to investing in green stocks. The economy of the country is expected to experience one of its highest growth rates over the last decade. If stocks respond in kind, then there could be opportunities for value investors to act on.
Small and medium-sized eco-friendly companies could reward investors with the best returns. The economic recovery is expected to have the highest impact on the smaller players. However, it can be challenging to identify the winners given the risk attached to small companies. This is where investment trusts and mutual funds come in handy for inexperienced investors.
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