UK equities – Feature


For the months ahead, the outlook for UK equities is broadly positive.


Jonathan Cunliffe, B&CE


“Over the long term, secular growth stocks tend to win out. But for the time being, we are quite happy with our position,” Cun- liffe says. LGPS Central is another pension pool with significant invest- ments in UK stocks. It holds 8% of the funds it has pooled in its Global Equity fund. For Mark Davies, LGPS Central’s investment director of active equities, this is the result of the pool’s internal setup.


“In our Global Equity fund, we have quite high exposure to value and are overweight Europe, particularly the UK. This is because as our partner funds have merged their country alloca- tions into a global approach, there were few asset managers that offered a dedicated UK active equity fund. “This tends to be more of a bottom-up approach,” he adds. “We see significant value in some companies, not so much in the UK market as a whole.”


Dividend boost


Dividends have historically been the strongest selling point for UK equities. Compared to US stocks, firms in the UK tend to be more established and offer a regular stream of income. On average, FTSE100 dividends tend to be twice as high as that of the S&P500. And this trend is likely to accelerate with rising commodity prices and rising interest rates which are set to benefit mining companies and financials, two key components of the UK’s blue-chip index.


Indeed, UK dividends surged by 46.1% during 2021, handing back a total of £94.1bn to shareholders, according to Link. However, these payments were concentrated among a few firms, mining in particular, and boosted by one off pay-outs. For ESG funds, which might exclude mining stocks, the pic- ture looks different. For 2022, Link predicts dividend growth will slow down to £87.5bn as special dividends will be lower.


Nevertheless, Border to Coast’s McLellan is confident that the current market environment will continue to benefit dividend streams. “Dividend yield is often closely associated with value, and so to the extent that an economic recovery stimulates an increase in inflation and raises the appeal of value stocks, then the UK market would likely benefit since it looks cheap relative to other global markets,” he says. Another factor to consider is the listings review by Lord Jona- than Hill, which is aimed at reversing the fortunes of UK stocks following a decade of outflows. Lord Hill proposed, among others, introducing a dual share class structure similar to that found in the US. Liberalising rules for free float require- ments and special purpose acquisition companies (SPACs) were also recommended. But will these measures make UK stocks more attractive? McLellan argues that the full effects of these reforms will only unfold over the long term. While he believes that they should, in theory, improve competitiveness, he warns that they could also have side effects for transparency. “One of the proposed reforms might also be considered to weaken the disclosure requirement for new issues and also potentially weaken the ability of shareholders to influence the behaviour of companies and so will place increased importance on investors conduct- ing thorough research themselves and paying even closer attention to governance structures and practices,” he says. Davies believes that if implemented, the listings review could fundamentally alter the composition of the FTSE. “This should allow those tech firms to become eligible for benchmarks and the index will not be as reliant on the old economy and become more attractive to institutional investors,” he adds.


Outlook


Does all this mean we will see a revival of UK stocks? For Davies, it remains important to be selective. “From a manag- er’s perspective, we are seeing the best value in financials and consumer staples like Tesco and Lloyds. “For us this is not so much about country allocation, we are active managers looking at this from a bottom-up perspective and weighing up the Tescos versus the Walmarts. Measured against that global benchmark, we are seeing greater opportu- nities in the UK.”


While Cunliffe is optimistic about the short-term outlook, he admits that there are potential headwinds. “We are broadly happy with where we are and our direction of travel. But over time, we will look towards reducing our exposure a bit. When we start getting into an environment where there is a bit less policy support, investors will want to pay a premium for earn- ings delivery.


“The point at which bond yields may have peaked may be the point where we will consider reducing our position,” he says.


Issue 110 | February 2022 | portfolio institutional | 41


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