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UK equities: winter of discontent?!

  • Despite the cost-of-living crisis we think ‘UK plc’ is in better shape than it is given credit for

  • Macro headwinds exist, but we think the negative sentiment is extreme and are aware markets can change quickly

  • We are patient investors and will concentrate on long-term company fundamentals and not just the next six months

For those of you old enough to remember 1978-79, we lived through what was known as the Winter of Discontent1. One of the most famous depictions of this was Leicester Square overflowing with rubbish bags after the binmen – or waste operatives, as we might say nowadays – went on strike. Overlooking this scene were billboards for the films showing at the square’s famous cinemas at the time. These were, somewhat ominously and appropriately, Jaws 2 and Damien: Omen II.

Talking of horror show sequels, Andrew Bailey, Governor of the Bank of England (BoE), is now painting a picture of a similar winter ahead of us this year with the cost-of-living crisis gripping the UK, inflation hitting double-digits for the first time since the early 1980s2, and widespread industrial action3. In 1978 Ian Dury & The Blockheads appropriately sang “What a Waste”, but given all of the above, and with the UK Misery index – a combination of inflation and unemployment – climbing for the best part of two years (Figure 1), it’s a Blockheads song from 1979 that we’re interested in: “Reasons to Be Cheerful, Part 3”.

Despite the song’s name, the Blockheads never released parts one or two. But in terms of outlooks we have always been on the lookout for a positive spin. In December 2019, with the UK’s withdrawal from the European Union set to be finalised, we wrote a viewpoint called “The

land that time forgot”4, in which we argued that the greater clarity around Brexit would spur a stock market rally and encourage a longer-lasting reappraisal of UK-listed companies. Then, in May 2021 as the world began to reopen following the Covid pandemic, we published “The crowds are returning”5, in which we noted increasing numbers of investors looking to the UK. And now, despite everything we’ve touched on above, once again we think there are still reasons to be cheerful … part 3!

Figure 1: UK Misery Index

UK Misery Index

Source: Bloomberg, 2022

Of course, countries around the world are experiencing issues – many of which are global and shared – and the UK is facing the very real prospect of hardship for many consumers and families. But if you lift the bonnet on “UK plc” the data looks pretty robust:

  • Households have a spending buffer worth 11% of GDP based on excess savings and consumer credit headroom
  • Non-financial corporations have enough excess cash that they could comfortably withstand a 2008-09-style cash burn
  • Banks’ capital ratios at the start of 2022 were nearly four times higher than pre-global financial crisis and even in case of a 2008-style shock would still have twice as much Tier 1 capital as they did in 2007
  • UK public sector debt maturity is the longest among developed nations – and double the OECD average of eight years
  • Unlike during the global financial crisis, financial fragilities should not exacerbate any recession scenario – and the economic recovery needn’t therefore be held back by necessary balance sheet repair
  • The UK PMI index has outperformed in six of the past seven months.6

So, despite the BoE and Bailey regularly talking inflation and recession – how much does this itself feed into the Misery Index? – there are a number of reasons to be cheerful:

1. Firstly, the UK remains an excellent hunting ground for investors, with private equity and overseas investors flocking to snap up undervalued, world-leading UK businesses as seen in the upsurge of M&A activity, in spite of geo-political factors and fleeting macro conditions. In fact, as we read recently in a Times article7: “A private equity investor based in New York, expressed mild surprise that Brits were so bearish about their own economy. Governments come and go, he said. The UK’s advantages – great capital markets, great ecosystem of advisers and lawyers, great workforce, great time zone – were undimmed in his eyes by our myriad current problems”. At the time, 36 UK listed companies were in offer periods, which was the highest number since the start of the Covid pandemic, and since then there have been a further five deals8.

2. Things are not as bad as they seem. Economic PMI indicators for the UK have been sitting stronger than their US and European counterparts, with the UK more favourably positioned in terms of self-sufficiency than other markets. Economies who may have depended on outsourced energy supply in addition to outsourced aggregate demand, military defence and/or monetary policy, for example, are more exposed to the risk of economic and political crisis. Most economies – and not just the UK – are facing a commodity and supply chain shock and cost-of-living crisis, but UK consumers are much less indebted than at the start of Covid with higher aggregate savings, while wage growth remains strong and housing wealth is at an all- time high.

3. The power of reinvesting dividends remains a key attribute of UK equities (Figure 2). This is something that has been forgotten about in the long bull market post the global financial crisis.

Figure 2: the benefits of compounding

The benefits of compounding

Source: Bloomberg, 2022

And if you don’t believe us, we can look elsewhere. As we mentioned earlier, economies which all too willingly relinquish autonomy over their energy, defence and monetary policy are more exposed to the risk of economic and political crisis. As Ambrose Evans-Pritchard wrote in the Daily Telegraph earlier this month9, “Germany in particular has manoeuvred itself into an economic and political crisis of Zeitwende proportions by outsourcing everything: its energy supply to Putin’s Russia, its aggregate demand to Xi Jinping’s China, its military defence to America, and its monetary policy to the ECB … In the lapidary words of Deutsche Bank board member Paul Achleitner, ‘It is not Schadenfreude to point this out’.”

Conclusion

We’ve previously made the case to be constructive on UK equities post-Brexit uncertainty and again after the Covid shock. Now we seek reasons to be cheerful as we face a cost-of-living recession. While market sentiment today seems to mirror that of summer 2020, back before there was any hope of a vaccine, we would note that markets rotate quickly.

As conviction investors, we would caution against the danger of whiplash investing. We are patient enough to continue to concentrate on company fundamentals to target strong, risk- adjusted returns, waiting for the intrinsic value we believe is there to be released. Buying equities involves long-term ownership and quality stewardship, and short-term losses will not fundamentally affect long-term intrinsic value. We want to be there to see this realised.

1 september 2022
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UK equities: winter of discontent?!

1 https://en.wikipedia.org/wiki/Winter_of_Discontent
2 https://www.theguardian.com/business/2022/aug/17/uk-inflation-cost-of-living-crisis-recession-looms
3 The Times, Postal workers join summer of strikes as winter NHS action looms, 10 August 2022
4 Columbia Threadneedle, The land that time forgot, Richard Colwell, December 2019 5 Columbia Threadneedle, The crowds are returning, Richard Colwell, May 2021
6 Bullet point data: Berenberg, July 2022, and Statista, July 2022
7 The Times, Americans still take a sunny-side-up view of our storm-wracked island, 19 June 2022
8 FactSet, as at 22 August 2022
9 Daily Telegraph, UK inflation is below the OECD average, and growth is beating Europe, 4 August 2022

Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication. The mention of stocks is not a recommendation to deal.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have
not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投 資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association.
Equities | August 2022
In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.
In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

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Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication. The mention of stocks is not a recommendation to deal.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have
not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投 資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association.
Equities | August 2022
In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.
In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

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