Shares Magazine – May 23, 2019

Whatever the opposite of a sweet spot is
called many investors think UK equities are
currently in one. With Brexit still unresolved,
some have put the market in the “too
ˆvwVՏ̻L>ÎiÌ°7…ˆiˆÌˆÃ՘iÀÃÌ>˜>Li̜ vi>À՘ViÀÌ>ˆ˜ÌÞ]>ÃÃ̜VŽ«ˆVŽiÀÃÜii“LÀ>Vi ̅i“ˆÃ‡«ÀˆViœ««œÀÌ՘ˆÌˆiÃVÀi>ÌiLވ̰ /…i}œL>˜>ÌÕÀiœv̅i“>ÀŽiÌ“i>˜Ã that international developments often set the tone for UK equities, and following the ÌÀœÕ}…ˆ˜̅iÜ>Žiœv̅i}œL>w˜>˜Vˆ> crisis (GFC) of 2007/08 they’ve had a good run, as have equities generally. However, Ài݈Ì…>ÃÃ̈œœ“i>À}i>˜Lii˜>À>}
on returns.
1iμՈ̈iÃ…>Ûi՘iÀ«iÀvœÀ“i}œL>
equities since the EU referendum. As a
Vœ˜ÃiμÕi˜Vi]Ài>̈Ûi̜}œL>iμՈ̈iÃ̅iÞ
are now the most lowly valued for decades.
The market also looks very attractive in

L܏ÕÌiÌiÀ“Ã]ˆÌÃVÕÀÀi˜ÌˆÛˆi˜ވi
ˆÃÈ}˜ˆwV>˜ÌÞˆ˜iÝViÃÃœv̅iœ˜}‡ÌiÀ“
average yield.

1. Unloved
   The negativity of international investors
   ̜Ü>ÀÃ1iμՈ̈iÈÃi˜ÌÀi˜V…iq}œL>
   v՘“>˜>}iÀÃ…>ÛiLii˜ºÕ˜iÀÜiˆ}…Ì»̅i
   UK for three years, according to the Bank of
   Ƃ“iÀˆV>iÀÀˆޘV…½Ã}œL>v՘“>˜>}iÀ ÃÕÀÛiÞ°˜ÛiÃ̜ÀÃ>ÀiÃ>ˆ̜Li՘iÀÜiˆ}…Ì an asset class when they are allocating less V>«ˆÌ>̜ˆÌ̅>˜ܜՏ˜œÀ“>ÞLi̅iV>Ãi°
   As patient investors, we are often
   interested in how corporate investors are
   Li…>ۈ˜}ȘViÜiÅ>Ài̅iˆÀœ˜}‡ÌiÀ“
   mentality. Overseas companies (and private
   iμՈÌÞ®LÕÞiÀÃ>ÀiV>«ˆÌ>ˆÃˆ˜}œ˜̅iÀi>̈Ûi
   valuation opportunity of UK equities, and
   sterling weakness.
   To cite two recent examples, Coca
   Cola has acquired the Costa Coffee
   V…>ˆ˜vÀœ“/-
   £ää}ÀœÕ«7…ˆÌLÀi>`]
   while shareholders in mid-cap speciality
   pharamceutical company BTG have

   
   

   ««ÀœÛi>LˆvÀœ“ œÃ̜˜-Vˆi˜ÌˆwV°

   
   

   
   

œÃÌ>
œvvii}i˜iÀ>ÌiÃ̅iLՏŽœvˆÌÃ
«ÀœwÌÃvÀœ“̅i1]>Ì…œÕ}……>Ã>v>ÃÌ
}ÀœÜˆ˜}ˆ˜ÌiÀ˜>̈œ˜>vÀ>˜V…ˆÃiLÕȘiÃð
In contrast, 90% of BTG’s revenues derive
vÀœ“VÕÃ̜“iÀÃL>Ãiˆ˜̅i1-^1. To our “ˆ˜Ã̅iLˆÃvœÀ̅iÃi>ÃÃiÌÃ՘iÀˆ˜i̅i
indiscriminate negativity towards UK equities

• many investors have sold ALL UK equities,
  LœÌ…̅iˆÀœ“iÃ̈V>Þ>˜ˆ˜ÌiÀ˜>̈œ˜>Þ
  vœVÕÃi`œ˜ið,i“i“LiÀ̅i1iμՈÌÞ
  market derives more than two thirds of its

revenues from overseas.

-…>ÀiLÕÞL>VŽÃ^2 LÞVœ“«>˜ˆiÃ>Ài

another interesting theme. It is, perhaps, no

Vœˆ˜Vˆ`i˜Vi̅>Ì7…ˆÌLÀi>`…>ëÀœVii`i`

to use the larger part of the the Costa sale

proceeds to repurchase stock.

7…ˆÌLÀi>`…>Íœˆ˜i`>˜Õ“LiÀœvœÌ…iÀ

UK quoted companies which have either

ÀiVi˜ÌÞˆ˜ˆÌˆ>Ìi`]œÀiÝÌi˜`i`Å>ÀiLÕÞL>VŽ

programmes, including Standard Chartered

and UK-focused peer Lloyds Banking.

It seems to us that many UK corporates

see their own shares as undervalued, so are

Ãi˜`ˆ˜}>˜œÌ…iÀÛ>Õ>LiÈ}˜>°

2. Undervalued
   ˜ii]Û>Õ>̈œ˜ÃÀiyiVÌ̅ii}Àii̜ which investors have shunned UK equities. /…iV…>ÀÌLiœÜÌÀ>VŽÃ̅i“>ÀŽi̽ÃÛ>Õ>̈œ˜ ˆÃVœÕ˜ÌÛiÀÃÕÃ}œL>iμՈ̈iÃL>Ãi`œ˜̅i
   average of three metrics. The metrics used

   
   

   Ài̅i«ÀˆVi‡Ìœ‡LœœŽÛ>Õi­ 6®À>̈œ>˜`
   «ÀˆVi‡Ìœ‡i>À˜ˆ˜}í
   ®>˜«ÀˆVi‡Ìœ‡ˆÛˆi˜Ã
   ­®À>̈œÃ°
   All valuation metrics have their strengths
   ˜Üi>Ž˜iÃÃiÃ]ÜVœ“Lˆ˜ˆ˜}̅ÀiiÀiÕViÃ
   the risk of distortions (see the end of the
   article for a description of these metrics).
   Based on this analysis, UK equities are
   ÌÀ>ˆ˜}>Ì>Îä ̄Û>Õ>̈œ˜ˆÃVœÕ˜Ì̜}œL>
   peers, close to their 30-year lows. While it
   is likely to persist until there is some form of
   clarity over the terms of any Brexit deal, the
   valuation gap provides an attractive entry
   point for investors with long time horizons.
   i>ÃiLi>Ü>Ài̅iÛ>Õiœvˆ˜ÛiÃ̓i˜ÌÃ

   
   

   
   

and the income from them may go down as

Üi>ÃÕ«>˜`ˆ˜ÛiÃ̜ÀÓ>Þ˜œÌ}iÌL>VŽ

the amounts originally invested.

The valuation of domestically-focused

equities is particularly attractive, and

Vœ˜ÃiμÕi˜ÌÞÜi…>ÛiLii˜ˆ˜VÀi>Ș}

exposures to this area of the market. The

՘ViÀÌ>ˆ˜ÌÞVÀi>Ìi`LÞ Ài݈Ì…>Ã`ÀˆÛi˜>

slowdown in the UK economy since the EU

ÀiviÀi˜`Փ­>LiˆÌ]LޏiÃÃ̅>˜vi>Ài`®]܅ˆi

̅i}œL>iVœ˜œ“Þ…>Ã…i`Õ«Üi°

Associated UK political uncertainty is

further weighing on valuations, and might

continue to do so given the relatively high

«ÀœL>LˆˆÌÞœviˆÌ…iÀ>i>`iÀň«iiV̈œ˜œÀ>

UK general election in 2019.

3. Attractive yield
   Over the past 30 years the dividend yield
   of the UK equity market, relative to the rest
   œv̅iܜÀ…>Ãœ˜ÞLii˜…ˆ}…iÀÕÀˆ˜}
   the 1991 recession and at the peak of the
   technology media and telecoms (TMT)
   LÕLLi­ÃiiV…>ÀÌ]LiœÜ®°
   ˜>L܏ÕÌiÌiÀ“Ã]̅i1iμՈÌÞ“>ÀŽiÌ

(^1) -ii«>}i£Ó{œv /½ÃÓä£n>˜˜Õ>Ài«œÀÌ>˜>VVœÕ˜ÌÃ]>Ì\…ÌÌ«Ã\ÉÉLÌ}«V°Vœ“É /ɓiˆ>É /É«vÉ>˜˜Õ>‡Ài«œÀ̇>˜‡>VVœÕ˜ÌÇÓä£n°«v (^2) -…>ÀiLÕÞL>VŽÃ>Ài܅iÀi>Vœ“«>˜ÞÀi«ÕÀV…>ÃiÈÌÜܘÅ>ÀiȘ̅iœ«i˜“>ÀŽiÌ°-ˆ“ˆ>À̜ˆÛˆi˜Ã]ˆÌˆÃ>Ü>ÞvœÀVœ“«>˜ˆiÃ̜ÀiÌÕÀ˜V>Å̜
shareholders.
ADVERTORIAL
Three reasons why the UK
stock market looks compelling
Perspective: UK equities are unloved, undervalued and high yielding:
an ideal scenario for stock pickers.
Sue
Noffke,
Head
of UK
Equities
>ÃÌiÀvœÀ“>˜ViˆÃ˜œÌ>}Ոi̜vÕÌÕÀi«iÀvœÀ“>˜Vi>˜“>Þ˜œÌLiÀi«i>Ìi`°