How to find growth stocks in the UK (Hint: You have to look in the right spot)

People say the UK just doesn’t have a lot of growth stocks. Investors turn to London when they’re looking for dividends or a naturally defensive tilt in a downturn. But when they’re looking for something a little more high-flying, they turn to Asia or the US to find it.

The UK market has picked up this reputation as a growth-stock desert partly because the notion of what defines a growth stock has become increasingly narrow. Initially, investors equated growth with tech, then with AI, and recently with just a narrow segment of the AI field – the companies involved with building AI infrastructure.

On this definition, Britain can’t compete. It doesn’t have semiconductor companies, cloud computing groups, or AI pioneers. Its listed technology sector is tiny, limited to a handful of smaller companies, and it has no Silicon Valley-style ecosystem pumping out the tech giants of the future.

Mind you, that isn’t the same as saying it has no skin in the game on digitization. The UK has companies that could harness AI to turn their proprietary data into strong, usable insights for their customers. These are companies like Experian, Relx, and the London Stock Exchange, to name a few. When investors are wondering “What’s next” for AI, these companies can legitimately raise their hands.

The UK’s powerful growth stories.

The digital transformation is one of four key growth themes in abrdn’s Murray Income Trust, where I’m an investment manager – and it packs a punch. And, sure, the other themes are a bit more overlooked in the current AI-obsessed environment, but they could prove equally as powerful in the longer term. Here’s a look at those.

The aging population.

This is a massive, multiyear trend across many Western economies. Populations are becoming top-heavy, increasing the strain on healthcare systems and the public purse. Some of the beneficiaries are clear: the pharmaceutical sector is operating against a backdrop of increasing demand for medicines, for example. Murray holds AstraZeneca, GSK, and Novo Nordisk in its portfolio – each one of them has drugs that address major healthcare needs, such as cancer treatment, vaccine development, and obesity care.

It also holds Convatec, which specializes in chronic care. This is an unglamorous but crucial area of healthcare. The company has four divisions: wound care, infusion care (supplying the cannulas for diabetes pumps), continence care, and ostomy care.

The fund holds Haleon too, and that’s a slightly different play. There is still a gap between life expectancy and healthy life expectancy, which will need to be addressed to reduce the strain of aging populations on public healthcare systems. And this firm has vitamins, specialist toothpaste, pain relief, and indigestion relief. In particular, the group sells Centrum Silver, one of very few vitamins that have actual clinical trials proving that they work to improve cognitive ability and bone strength in people over 50.

The green transition.

The UK stands at the forefront of the energy transition. The incoming government has made clean energy a priority, creating a supportive environment for companies in the energy sector. It’s already announced the creation of Great British Energy, a new, publicly owned, clean energy firm, aiming to accelerate investment in renewable energy, and offshore wind in particular.

National Grid is a vital cog in the transition to renewable energy. It should benefit from investment in transmission and distribution, but also from renewed support for decarbonisation. It began what it’s calling “the great grid upgrade” in May, adapting the UK’s transmission and distribution infrastructure to meet the growing demand for electricity. National Grid estimates that electricity consumption in the UK will increase by approximately 50% by 2036 and more than double by 2050, putting more pressure on the grid.

The distribution of energy generation will also change as renewable energy sources come onstream, with electricity generated by wind farms needing to move to the areas of greatest demand, particularly the UK’s major cities. This will require significant infrastructure development. Overall, the asset bases of National Grid and SSE will increase significantly.

There are other important businesses involved in the transition. Genuit, for example, has products that help homes become more energy efficient – for example, underfloor heating, recyclable plastic pipes, and ventilation products. And it’s likely to see a surge in demand as the government incentivizes efficient homes.

Emerging global wealth economies.

The UK’s recent economic performance may have been strikingly lackluster, but there are pockets of good growth in other places. There are emerging, fast-growing consumer economies in Asia and Latin America, for example. And UK companies are tapping into the potential of these markets. Unilever and Diageo selling their popular brands to expanding consumer markets around the world. In fact, 58% of Unilever’s business is now in emerging markets. Firms like these are poised to become key beneficiaries of rising global wealth – offering investors an attractive pipeline of growth.

The key takeaway for investors.

Absolutely, AI infrastructure is a big growth theme in the global economy – but it’s by no means the only theme. And after a strong run for the technology giants, it may be past its prime anyway. Luckily, there are other, overlooked areas of growth – with valuations that are often more attractive.

The UK does have growth. It just doesn’t have the type of growth that markets have wanted lately. However, that could change as investors recognize that they don’t have to pay high prices to tap into supportive long-term themes in a global economy.

-

Capital at risk. Our analyst insights are for educational and entertainment purposes only. They’re produced by Finimize and represent their own opinions and views only. Wealthyhood does not render investment, financial, legal, tax, or accounting advice and has no control over the analyst insights content.