The UK economy needs only a small change in sentiment to grow significantly, according to James Henderson, who runs the Law Debenture investment trust and other mandates at Janus Henderson.
He told FT Adviser people's spending habits could easily change if they perceived their situation to be only "slightly less bad" than they were expecting.
He suggested there was a risk of the UK “talking itself into recession”, but added companies were quite well positioned, with opportunities particularly further down the market cap scale.
He said: “When you hear a prime minister telling you things are bad, that probably means the last person in the country who is going to say it, has now said it.
"This time last year we were in recession. And now the IMF are upgrading the UK’s growth forecast.
"The thing is, it doesn’t require a dramatic shift in sentiment to bring about a big change in the economy, and that could really help UK equities.
"Given the uncertainty and pessimism, all it could take is for people’s experience to be slightly less bad than they are expecting, for the mood to change markedly.”
The IMF upgraded its forecast for the UK economy for this year to 1.1 per cent, from the previous 0.7 per cent.
Dan Coatsworth, investment analyst at AJ Bell, said this was still lacklustre but put the government in a better position than it would have otherwise been.
“Stronger than previously expected economic expansion this year means the government isn’t starting its ‘difficult decisions’ strategy to repair the nation’s finances from a very weak position," he said.
"The IMF’s new UK forecast of 1.1 per cent growth in 2024 is lacklustre compared to 3.2 per cent world economic growth, but something is better than nothing given the uncertain backdrop."
Companies 'well positioned'
Henderson believes the biggest risk is that the UK “talks itself into recession” whereby the individual pessimism of each citizen creates a collective pessimism and people refrain from spending, causing an economic downturn.
He said while this was a substantive risk to the outlook for the economy and the stock market, from an investment point of view, the best opportunities were further down the market cap scale and in the higher risk businesses.
He said: "Because of all of the uncertainty in recent years, company management in the UK have not over-extended themselves, they have focused on efficiency, so are actually quite well positioned if we get a downturn from here.
"The risk sometimes is that when the economy is flying company managements become convinced of their own genius and so try to expand, but by the time the expansion has happened the economy may have turned and they are over-stretched. But this is not happening now.”
His reason for not focusing on the larger, more defensive part of the market centres on valuations.
Henderson said: “I’ve spent forty years on the UK equity desk at Hendersons. When I started, the big pension funds had 40 per cent of their total assets in equities, and 70 per cent of that 40 per cent would be in UK equities, now they have about 4 per cent in UK equities.
