UKSep 18 2020

Ruins to rewards: UK equities dubbed the ‘dark horse’

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Ruins to rewards: UK equities dubbed the ‘dark horse’
Credit: Bloomberg Finance

The UK is the “dark horse” of global equities as the majority of investors find it difficult to navigate its headwinds, but the brave will be "rewarded", commentators have claimed. 

Analysts and fund managers are optimistic on the prospects for “unloved” and “cheap” UK companies on a longer-term view, with the market set to benefit from pent-up demand and cyclical stocks in any global economic recovery after the coronavirus crisis.

Kevin Boscher, chief investment officer at Ravenscroft, said: “The combination of extremely accommodative domestic and global monetary and fiscal policies, an undervalued pound, pent-up demand and improving sentiment will eventually lead to a powerful economic and earnings recovery. 

“UK markets will also benefit from a powerful recovery in global economic activity with the more cyclical-oriented sectors expected to participate as well. UK equities and sterling look cheap on both an absolute and relative basis with much of the bad news already likely discounted.”

Darius McDermott, managing director at FundCalibre, agreed. He said the UK was the “dark horse” of equity investing as it was unloved by “pretty much everyone”.

He explained: “The outlook is uncertain, the market is unloved and pretty much everywhere else in the world looks a better investment. 

“But we have some great companies and the winners will emerge very strong. Good stock-picking, as ever, will be important. Brave investors at this point may well be rewarded over the long term.”

The backdrop

Investors have fled the market this year as the country’s handling of the coronavirus crisis, the dividend drought and uncertainty over Brexit deals shook shareholder confidence.

For example, Helen Bradshaw, Quilter’s income manager, moved funds out of the UK during the crisis while Thomas Rostron, chief investment officer for Embark’s multi-asset fund range, said he had reduced the funds’ exposure to the UK to invest in other equity markets.

Meanwhile Craig Rippe, head of multi-asset at Canada Life Asset Management, said the pandemic had pressed fast forward on several trends in the investment industry, including the move away from ‘home bias’ and the general shift from the UK market.

And the proof is in the figures: investors pulled more than £1.5bn, according to Investment Association data, from funds in UK sectors from May to July.

By comparison, the Global sector saw three months of inflows as investors plunged their cash into global funds – heavily exposed to the US – to the tune of £2.5bn.

The UK has lagged other markets in terms of performance for some time, but particularly in the aftermath of the coronavirus-induced market crashes.

The S&P 500, the Nikkei 225 and China’s SSE Composite Index are all up year-to-date, with the US blue chip index having climbed 50 per cent since March 23.

Closer to home, Germany’s Dax, although not recovering all of the losses in the market crash, is up 56 per cent since the end of March.

But the UK has struggled to recoup its losses – the FTSE 100 is up only 20 per cent since global markets tumbled mid-March and is still down 20 per cent since the start of the year.

A value play

Richard Buxton, head of strategy – UK Alpha at Jupiter, said he understood why the UK could “fall into the ‘too difficult’ cupboard”, but thought contrarian investors who were patient were likely to be rewarded.

He said: “Things that are cheap and unloved tend to reward the patient. There is a lot of value in the UK.

“Add in a currency that’s pretty cheap itself, and it ought to be attractive for the contrarian investor.”

As value funds and shares – which put more of an emphasis on the price paid for a stock rather than the near-term earnings growth prospects of a company – typically perform better when inflation and interest rates are rising and economic growth is strong, the strategy has been out of favour for more than a decade.

But buying companies currently “unloved” at low share prices mean the returns can be much greater when, or if, the tides turn.

UK stocks Mr Buxton said would rally in an economic recovery included Barclays and Burberry, which were “very cheap shares” compared to their balance sheets.

John Monaghan, head of research at Square Mile, agreed. He said: “The proliferation of share price returns between those stocks with a more international orientation versus domestic companies, effectively since the Brexit vote, is stark.

“But the UK’s issues are well publicised and, although we recognise the future of some companies and industries may well be impaired, there remains a number of companies that are very attractively valued with good growth prospects.”

Discretionary fund manager Brooks Macdonald has started to reduce the scale of its underweight holding of the UK over the past year.

According to the team, the increased political stability from a large Conservative majority and the UK’s relative valuation attractions were “encouraging”. Time will tell.

imogen.tew@ft.com

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