UK equites – Feature
UK EQUITIES: REJECTION TO RESURRECTION?
London-listed companies are unloved but attractive, so are institutional investors ready to jump back in? Moira O’Neill reports.
Like most equity markets, the UK has its ups and downs. This year started well as funds flowed into UK assets, but bank fail- ures in the US and Europe put an end to that. This is just one of many headwinds UK equities have faced in recent years, with the list including everything from Brexit, fre- quent changes of government, Covid, war in Ukraine and the spike in inflation. But they have also enjoyed periods of phe- nomenal returns. Putting the UK equities picture in a longer historical perspec- tive, Will Ballard, head of equities at Border to Coast Pensions Partnership, says: “They annualised mid-teen returns through- out the 1980s as labour market reforms were enacted and infla- tion was brought under control. “Then, following the bursting of the dotcom bubble, returns from 2003 through to 2007 were also exceptional, similarly after the correction induced by the financial crisis in 2008 and then in 2020 with Covid,” he adds.
Going global Today, many analysts believe the opportunity for attractive future returns from UK equities may be at its greatest. UK stocks remain cheap on absolute and global comparisons. As
the UK growth outlook improves, and interest rates peak – the UK is very much the laggard internationally in tackling infla- tion – the prospects for equity inflows must amplify. Troy Income and Growth Trust senior fund manager Blake Hutchins says: “We’re definitely optimistic. One of the big attractions is that the UK is the most international stock mar- ket in the world, with 80% of its revenues coming from over- seas. But there is undoubtedly a discount for UK stocks.” So why are investors overlooking the region’s long-term attrac- tiveness? Equity outflows have dominated the pensions world for many years and this includes UK equities. Stuart Widdow- son, portfolio manager of Odyssean Investment Trust, says: “The long-term statistics show that pension funds have dumped UK equities over the past 35 years.” He reports allocations falling from more than 50% of pension scheme assets to less than 10%. Schroders UK equity portfolio manager Graham Ashby says: “This would have been unfathomable to many of the post-war generation, when there was a boom in final salary pension schemes and a recognition that equities typically provide bet- ter long-term real returns than other asset classes, such as gilts or cash.”
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