jp
JP
Japan
jp-JP
jp_inst_classes
inst
Institutional
jp
jp
Insights

UK equities: resurrection of the deplorable asset class!

  • The UK remains very much out of favour, with only Russia and Brazil performing worse year-to-date, and asset allocators still reluctant to look at UK equities, which are even cheaper than they were a year ago. International companies listed in the UK, pound-for-pound are on double discounts versus if they were quoted in Europe or the US, and an average of a 40% discount to the World MSCI.
  • That the UK remains so unloved typifies the high levels of consensus thinking in markets. We continue to firmly believe in the UK, but trends often go on for longer than predicted. This creates the opportunity we see today, as it amplifies the impact when the switch in momentum finally occurs.
  • Brexit has finally been determined and the late, thin deal provides some certainty, as would a reasonable recovery in 2021. Given this, a lot of the short positions against UK equities are likely to be closed. Although Brexit will still result in some short-term frictional trade costs, this deal is a good outcome, removing a large part of the uncertainty that has weighed on UK equities in recent years.
  • Dividends have a critical role in pensions, savings and the income of the British public. The unprecedented nature of the pandemic, and the consequential need for companies to restore their liquidity, led to a contraction in dividend payments in April and May which was one of the quickest, sharpest and broadest ever encountered. This is a process which comes at close of every cycle, but Covid-19 meant it was condensed into just three weeks. However since then, as conditions have stabilised, the tide has turned and 60 companies have already reinstated dividends. More will follow.
  • Looking ahead we expect more prudent policies and better cover, and even in the worst-case scenario the UK market should still offer a healthy yield premium to bonds by next year. For now, however, balance sheets and liquidity are paramount.
If the UK equity market was out of favour at the beginning of 2020, it’s even more so now. Until the arrival of three vaccines prompted a wave of market exuberance towards the end of the year, UK equities had fallen approximately 20%. The only two worseperforming equity markets were Russia and Brazil and asset allocators remain reluctant to look at UK equities,1 which are now even cheaper than they were a year ago.
In previous market crashes, the stocks that led the markets higher in the earlier peak years have suffered most in the shakeout. Logically, that would mean US technology or China stocks being this year’s laggards; yet in 2020 they stand out as the brightest stars in global markets. Meanwhile international companies listed in the UK, pound for pound are on double discounts versus if they were quoted in Europe or the US. An average of a 40% discount to the World MSCI!2
Figure 1: FTSE All Share/S&P 500 Composite
Ftse all share s&p 500 composite
Source: Refinitiv Datastream

Bipolar marketplace

Equity markets have become bipolar, with the five big US tech stocks – Facebook, Apple, Alphabet, Amazon and Microsoft – accounting for most of the US equity market’s strong performance. But there are twists and turns to come. As UK chancellor, Rishi Sunak, said in the November Spending Review, the country’s 11.3% contraction in GDP for 2020 is the biggest for 300 years.3 Although the economy is forecast to recover in 2021 and 2022 we still have a boneshaker ride ahead.

We continue to firmly believe in the UK, but trends often go on for longer than predicted. This creates the opportunity we see today, as it amplifies the impact when the switch in momentum finally occurs

Consider how quickly the UK equity market rotated after Pfizer and BioNTech announced their successful Covid-19 vaccine data in mid-November. Many months of outperformance by growth stocks was erased in a single day, revealing that many investors have similar positions. The proliferation of quantitative investors, ETFs and factor-based investing has made the market unbalanced and typifies the high levels of consensus thinking.

We continue to firmly believe in the UK, but trends often go on for longer than predicted. This creates the opportunity we see today, as it amplifies the impact when the switch in momentum finally occurs.

Beware the closing window

However, the window on unlocking this potential value is closing. While sentiment about the UK economy has been hurt by both Covid-19 and Brexit, the equity market does not need a great recovery to perform better.
Brexit has finally been determined and the late, thin deal provides some certainty, as would a reasonable recovery in 2021. Given this, a lot of the short positions against UK equities are likely to be closed. Although Brexit will still result in some short-term frictional trade costs, this deal is a good outcome, removing a large part of the uncertainty that has weighed on UK equities in recent years.
By the end of 2021 investment should be building up and businesses getting back on their feet. Sadly, there will be more insolvencies than there were after the global financial crisis, because banks have more capital today and can afford to call in their bad debts, and unemployment may reach similar levels to the 1980s, when three million people were out of work.
But the UK stock market is coming off very depressed valuations. Hence why mergers and acquisitions remain high and are accelerating, because there is a lot of appetite to ignore the short-term noise and focus on valuations – not from market practitioners, but rather private equity and US corporates. They see time is running out. The former remain too timid to exploit this valuation arbitrage, but waiting much longer for the certainty with which to act may see the opportunity lost.

Dividends are coming back

Dividends have a critical role in pensions, savings and the income of the British public. The unprecedented nature of the pandemic, and the consequential need for companies to restore their liquidity, led to a contraction in dividend payments in April and May which was one of the quickest, sharpest and broadest ever encountered. This is a process which comes at close of every cycle, but Covid-19 meant it was condensed into just three weeks. However since then, as conditions have stabilised, the tide has turned and 60 companies have already reinstated dividends.4 More will follow.
But looking ahead we expect more prudent policies and better cover, and even in the worst-case scenario the UK market should still offer a healthy yield premium to bonds by next year. For now, however, balance sheets and liquidity are paramount.

The best opportunities for a decade

As the UK’s double discount starts to narrow, following the greater clarity that Brexit should bring and as vaccines progress, 2021 and into 2022 could be exciting for the UK equity market. Even the UK’s quality growth companies like Unilever are a lot cheaper than their rivals globally. We believe it’s not just one or two areas of the UK market that are cheap; the whole market is cheap!

As the UK’s double discount starts to narrow, following the greater clarity that Brexit should bring and as vaccines progress, 2021 and into 2022 could be exciting for the UK equity market

The best time to invest is when it feels uncomfortable. For sure, the UK remains out of favour, but three quarters of UK companies’ profits come from international markets, so the market should be driven by global GDP.
As active managers we are excited about the UK market. We see some of the best opportunities in distressed stocks for a decade. While quantitative investing and factor investing focuses on which buckets stocks are in – a form of paint by numbers – active management logically relates the value offered by a stock to its price. We look forward to a levelling up for the UK market and its unloved companies.
18 12月 2020
Share article
Key topics
Related topics
Listen on Stitcher badge
Share article
Key topics
Related topics

PDF

UK equities: resurrection of the deplorable asset class!

1 Bloomberg, Morgan Stanley, as at 30 September 2020.

2 Morgan Stanley, as at 30 September 2020.

3 FT.com, Sunak warns of ‘economic emergency’ as borrowing hits record £394bn, 25 November 2020.

4 Badon Hill Asset Management/Columbia Threadneedle, November 2020.

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Related Insights

28 3月 2024

Jeremy Smith

Head of UK Equities

The Good, the Bad and the UK Stock Market

After an exceptional 2022 the UK stock market reverted to type, underperforming in 2023. With money continuing to disappear from the market, two potential catalysts for change have emerged.
Read time - 5 min
5 6月 2023

UK equities: the song remains the same

Despite the cost-of-living crisis we believe the gloom overhanging the UK economy is overdone
Read time - 2 min
16 3月 2023

Pauline Grange

Portfolio Manager

Identifying key sustainable themes for 2023 and beyond

The desire for energy security coupled with decarbonisation means there is now a sense of urgency around a green transition.
Read time - 3 min
9 12月 2024

Rosalie Pinkney

Credit Research Analyst, Fixed Income

European banks: strong fundamentals and pockets of value

It’s a sector which we’re positive on, for several reasons ranging from regulation and valuations to fundamentals.
9 12月 2024

Steven Bell

Chief Economist, EMEA

Is the UK heading for recession?

There has been a major decline in optimism about UK economic prospects in recent months.
9 12月 2024

Christopher Mahon

Head of Dynamic Real Return, Multi-asset

Consolidate with caution - Too much focus on scale could come at the expense of innovation

Chancellor Rachel Reeves is right to identify excessive risk aversion as a critical issue in UK pensions. Her solution is consolidation, but while boosting scale this way is helpful, it is no magic wand.
true
true

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Awards

Columbia Threadneedle Investments has received accolades across a wide range of sectors and funds, demonstrating the breadth of our investment expertise.

Contact

For more information about Columbia Threadneedle Investments or our products please contact us.
You are now leaving Columbia Threadneedle Investments Japan’s website and entering Columbia Threadneedle Investments’ global media centre page. Please read this Important Information. If you do not agree to any part of any section please do not accept and enter the website.

外部サイトに移動します。移動後は外部サイトの利用条件が適用されます。ご同意いただける場合のみお進み下さい。