Since manufacturing PMIs rebounded significantly with the global index at its highest level since mid-2018, UK equities are looking more attractive. Previously, the deep valuation discount could be explained away by weak profitability relative to global peers, now with industry looking stronger these discounts look more favourable.
Ben Wallace, senior investment manager at Janus Henderson says that while it’s possible to build a variety of style portfolios using the FTSE 100, looking for growth stocks can be quite expensive compared to international peers. “There’s scarcity value, finding a stock with top line growth of 5 percent in the US is common, in the FTSE it’s a bit more of a rare commodity so relatively expensive,” Mr Wallace told Fundeye.
He also described the FTSE 100 index as being ‘old economy in nature’ referring to the number of energy, mining and financial giants that make it up. These companies will tend to trade on low multiples and will benefit if bond yields increase. However, in a period where bond yields have been continually supressed this has led to a lot of these companies' pension liabilities increasing.
Indeed, the recent vaccine newsflow is supportive of this positive view on UK equites because it reduces the downside tail risks to the global recovery and indeed to the UK domestic recovery. UK equities have already bounced sharply following the news, outperforming the global index by 5 percent recently but the market’s depressed valuations suggest that there is likely to be more upside to come.
However for some the lack of tech giants in the UK’s main market is something that simply can’t be overlooked, regardless of rebounds in other sectors which are well supported by the FTSE 100. Quentin Marshall, head of private banking at Weatherbys had this to say about a potential ‘patriotism bias’ when it comes to investing.
“We believe the argument for having a UK bias in an investment portfolio is getting weaker and weaker. The UK’s share of global markets has been declining for several years and now represents just 3.54 percent of the global market. There is, in our view, an issue with the UK market. Yes, the UK has lots of exposure to energy and banks – more than other markets – but its exposure to the information technology (IT) sector is very small, just 1.41%. This is the main reason for the UK’s underperformance compared to global markets. The UK hasn’t got a big IT exposure, yet these stocks have done pretty well elsewhere in the world, and that has been a huge problem for investors with a UK bias in their portfolios,” he said in statement.
For the tide to truly change for UK equities there really has to be some certainty around Brexit and if a deal is struck before the end of the year, the asset class can win back its supporters. Certain economic think tanks put the chances of a deal being struck at 60 percent before year-end, as we approach December this may seem optimistic but would be a boost for the main market.
