Local Government Pension Schemes

For professional clients only.

Our case for UK Equities

Luke: Hi, I’m Luke Chappell

Sam: Hi, I’m Sam Brownlee

Luke: When I started my career in UK equities in 1990, pension funds and insurance companies owned half of all UK listed shares and that has meaningfully reduced, driven by legislation, regulation and accounting standards - now just 4% of UK listed shares are owned by pensions. (Source HSBC, ONS 30th April 2024)
Three decades of persistent selling should be coming to an end - Is that enough though to improve the outlook – where’s the marginal buyer coming from?
Companies are buying themselves – share buy-backs are shrinking the market every year - and the UK offers a relatively high dividend yield. (Source HSBC, ONS 30th April 2024)

And companies are buying other companies – M & A has been seen across many market sectors – Banks, Mining, Housebuilders, Insurance, Technology - and, whilst some deals haven’t reached fruition, they have highlighted the attractive valuations in the UK market

We don’t expect accounting standards to change, insurance regulation to be undone, or the Pensions Act to be overturned, but we have seen greater political scrutiny of the allocation by public pension schemes to UK equities. (Source: Morningstar, Budget Pensions news article, 6 March 2024)

And we should see buyers from overseas, attracted by the valuation discount at which many UK shares trade relative to their global equivalents; but lowly valuations haven’t been enough to attract buyers in recent years, so what’s different now?

Sam: Brexit has created headwinds for companies – regardless of the view of the outcome or the economic impact, this has increased (the perception of) sterling volatility and hence the cost of equity – and that might change for the better with a period of political stability

This matters more for some businesses than others – it shouldn’t impact a high quality analytics company or large pharmaceutical business at all whereas it’s clearly more important for a domestic bank

And there are some better signs for the UK: economic surprises are positive, household incomes in aggregate continue to grow in real terms with consumer confidence making new highs; and investment has been boosted by fiscal incentives

We now feel more than ever that the UK market is ripe for stock picking

The UK market is concentrated both at the stock and sector level

Our preference is to focus on long term growth compounders – quality businesses that thrive in all environments.

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