The UK is often seen as a dull, low-growth market. This view needs to be challenged, says David Goldman, fund manager on the BlackRock Income & Growth fund.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The UK stock market has been unloved. Global asset allocators have significantly reduced their weightings in recent years and the UK All Companies and Equity Income sectors continue to shed assets. The combination of a weak economy, political turmoil and structural factors have pushed sentiment lower. But the reality for UK companies is far more positive than this gloomy picture might suggest.
Since June 2016, UK equity income funds have seen £33 billion in outflows, while UK large-cap equity funds have seen £18 billion in outflows, according to Morningstar, equivalent to 60% and 23% of starting assets respectively.1 This has continued even amid an improvement in the UK’s economic fortunes since the start of the year.
The reasons for this weakness are myriad: there have been a number of structural reasons. There has been a move away from UK funds towards global funds, so UK sectors have shrunk as a share of the overall fund universe.2 UK pension funds have dramatically cut their exposure to their home market over the past 25 years,3 withdrawing a vast £400bn from the market.
The UK has also seen political upheaval in the wake of the Brexit vote and its economic performance has been poor. Even though UK companies draw their revenues from around the world, it has knocked sentiment towards the UK market and pushed international investors to look elsewhere. The UK is often seen as a dull market, full of boring companies in old economy sectors such as mining and energy.
We believe this perception needs to be challenged. In reality, many UK companies are plugged into strong growth markets. The UK’s consumer goods companies draw their income from across the world, including exciting, fast-growing emerging markets. The FTSE All Share has companies in faster-growing sectors such as media and technology sector, alongside areas such as banking. Investors are not condemned to hold a portfolio of old economy stocks just because they are investing in the UK market.
Dividends
Dividends are another important factor for UK companies. UK companies paid out £94.3bn in dividends in 2022, a rise of 8% on the previous year. Underlying payouts, which strip out special dividends, saw an even stronger rise.4 Dividends have risen steadily since the pandemic and we find plenty of companies paying strong and rising dividends to shareholders, without compromising investment in their businesses.
As it stands the aggregate valuation of the UK market is lower than its peers. The MSCI United Kingdom is trading at a price to earnings ratio of 11.8x, compared to 20.3x for the MSCI World.5 Price to earnings ratios are a measure of a company’s valuation relative to its earnings.
Sentiment
Sentiment remains a significant hurdle for the UK market. Investors have fallen out of love with UK companies and the region continues to see outflows.6 It can take investors a long time to change their mind about a particular area. It is possible that the UK will remain out of favour even now some of the political headwinds have receded and the economy does not look as vulnerable.
Nevertheless, even if investor sentiment doesn’t improve, corporate interest may provide a boost. International private equity buyers are taking an increasing interest in UK firms, with bids for groups such as John Wood Group, Network International and THG (formerly The Hut Group).7
The UK is a more interesting and diverse market than it is given credit for. It is not just about mining and energy. In reality, UK companies are involved in some of the world’s strongest growth trends. Investors just have to look a little bit deeper to find pockets of strength.
Sources:
- Morningstar - https://www.morningstar.co.uk/uk/news/235192/why-uk-equity-income-funds-are-suffering.aspx - 16/05/23
- The Investment Association - https://www.theia.org/industry-data/fund-statistics/statistics-by-sector - 01-06/23
- Bloomberg - https://www.bloomberg.com/news/articles/2023-03-17/uk-pension-funds-flee-the-equity-market-adding-to-london-woes - 17/03/23
- LinkGroup - https://www.linkgroup.eu/insights/publications/uk-dividend-monitor-q4-2022/ - 17/08/23
- MSCI - https://www.msci.com/documents/10199/587e9bae-0a65-49e8-b1c6-bb84cf061441 - 17/08/232.
- The Investment Association - https://www.theia.org/industry-data/fund-statistics - 06/07/23
- The Guardian - https://www.theguardian.com/business/2023/apr/17/thg-shares-surge-on-takeover-move-amid-spate-of-us-private-equity-offers-for-uk-firms - 17/04/23
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Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
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