May 2024
Market Commentary
The end of the road or a great opportunity for UK equities?
(3 min read)
Earlier this month, Coutts & Co, the private bank, announced that it would be selling over £2.5 billion worth of UK equities in client portfolios, reducing their weighting from 32% to 3% in the UK domestic stock market. The idea is that investors should take a global view on their investments rather than having a home bias.
The chart below illustrates that this is not a new or recent shift in sentiment away from the UK market. The lack of sponsorship for UK equities from pension funds and insurance companies has been going on for some time but the inability of the London Stock Exchange to attract new listings because companies can get higher valuations elsewhere, particularly New York, continues to undermine the marketplace.
Source: www.telegraph.co.uk/business 26/04/2024
The UK is also regarded as a market of ‘value’ rather than ‘growth’ stocks and dominated by financials, miners and ‘ESG* unfriendly’ energy companies. UK investors have also benefitted significantly from US Dollar strength by investing away from the UK, although this is unlikely to last forever. Sitting next to a senior London wealth manager recently it was confirmed that the move by Coutts has become a common theme.
The question is whether reducing the UK now is ‘shutting the door after the horse has bolted’, particularly given absolute and relative valuations to other markets. It might be that foreign investors have been put off due to uncertainty surrounding Brexit, but currency markets would suggest that adjustment took place years ago. The UK equity market not only provides a competitive dividend yield of 4.1%, compared to 1.5% for the US S&P500, and continued share buy backs, but in our view looks cheap on a valuation basis. The market trades on 11.2x multiple** below the 20-year average of 12.6x but also looks cheap relative to global peers with Europe 14.9x, Japan 16.0x, USA 21.4x and even cheaper than Emerging Markets at 12.0x***.
At Montgomery Associates, we have been gently increasing our weighting to UK equities based on absolute and relative value discussed above and feel that the negative headlines are fully discounted in the outflows from the market already seen (see chart) and that underlying fundamentals are positive as indicated by increased Mergers and Acquisitions (M&A) interest in UK companies.
* Environmental, Social and Governance
** Price/Earnings ratio multiple is a measure of share price relative to earnings per share, providing an indication of how expensive or cheap a market or company’s price may be.
*** Data Source: Janus Henderson UK Responsible Income fund
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
15th May 2024
