“In the school playground of global markets, UK equities can be found sitting forlorn and friendless at one end of a seesaw.” – Andrew Williams, Schroders
To say UK equities are unloved by investors would seem both an understatement and unpoetic, given the quote above. But unloved they are.
In the Bank of America Global Fund Manager Survey of September 2020, only the energy sector was more of an underweight in portfolios than the UK*. Even banks and real estate investment trusts were more popular.
And it’s not hard to think of a number of reasons as to why this is. As Fidelity’s Tom Stevenson put it: “If the UK were a middle-aged man, he’d have just got divorced, lost his job and received bad news from the doctor."
Brexit, COVID and a lockdown-induced recession have all taken their toll – as has the make-up of the UK stock market. Being overweight oil and banks and underweight technology firms has not helped a recovery. Everything has conspired to leave UK companies unloved, under-owned and under-valued.
But while UK plc has been shunned by investors, global competitors have seen opportunities and, as JOHCM UK Dynamic manager Alex Savvides puts it, “Have been making cheeky bids for good companies at rock-bottom prices.”
Chris St John, manager of AXA Framlington UK Mid Cap fund, agrees: “There has been a big uplift in M&A [mergers and acquisition] activity with £22bn of bids since July,” he said. “William Hill, Hastings Insurance and G4S, for example, have all been targeted as the low cost of funding and the cheap shares have made UK companies attractive.”
If global companies like the UK is it time investors did too? John Chatfeild-Roberts, co-manager of Jupiter Merlin Growth Portfolio, certainly thinks so: “The fund had an 18% weighting to UK equities in the summer,” he said. “Today we have increased that to 32% by adding to the value end of the spectrum. Many value companies are getting better earnings momentum and are attractive on a risk/reward basis.”
John is not alone in his renewed interest in the sector. As Schroders’ Andrew Williams said: “When news of Pfizer’s successful vaccine broke, some Britons went panic buying again. Except this time round it wasn’t toilet roll or pasta getting grabbed but beaten-up shares.”
Figures from JP Morgan show that 9 November 2020 – the day of the Pfizer announcement - provided the biggest one-day value factor gains in history**. Leading world markets upwards were “a host of hitherto downtrodden and unloved businesses” – from energy and banks through to airlines. At the same time, a range of those ‘work from home’ stocks, whose shares have directly benefitted from the pandemic over the last six months or so, saw prices lurch in the opposite direction.
The question now for investors is whether this marks the passing of the baton from growth to value investing?
Perhaps surprisingly, the team being the Schroder Recovery and Schroder Income funds are cautious. “The champagne will remain on ice for a while yet for the same reason we have managed to resist turning to anything even stronger during value’s prolonged period in the wilderness,” they said. “Investing is no place for extremes of emotion in either direction and a single ‘up’ day for value stocks – even one as marked as we saw recently – does not make a recovery.”
Artemis UK Select managers Ed Legget and Ambrose Faulks are more confident and expect a continued rotation from ‘Covid winners’ to ‘Covid losers’. “Ask yourself this,” they said. “Will you be doing more staycations or overseas holidays next year than this? Will you visit the office more and do fewer Zoom calls? Stand back and it becomes easier to see how many of the trends that have driven many of this year’s winners will slow and potentially reverse next year.
“Airlines will fly again. Houses cannot be built fast enough to meet surging demand. Banks have already been lending. There are legions of undervalued businesses that will see their earnings recover significantly whilst taking market share as competitors fall by the wayside. Sifting through potential recovery stories has been our focus for some time now – and if we’re right, this really is just the beginning.”
The RWC Equity Income team added: “The UK market feels eerily reminiscent of 1999 to us with value fund managers suffering record redemptions whilst money pours into growth funds. It is, of course, worth mentioning that the five years following 1999 were some of the greatest for value investors.
“We don’t know for sure whether this is yet another false dawn or the start of a regime change, but we can surmise that the severity of the moves were the result of record wide dispersion in valuations between growth and value stocks, lopsided market positioning and illiquid markets. At the very least this should serve as a warning about lack of diversification (100% growth, 0% value) or poor diversification (mixing bonds and bond like equities). With an economic recovery looking more likely in 2021, it is possible that some investors need to start to consider increasing their exposure to value stocks.”
Investors considering increasing their value holdings could consider the following funds which are on the Chelsea Selection: Artemis UK Select, JOHCM UK Dynamic, Jupiter UK Special Situations and Schroder Recovery.
*Source: River and Mercantile, 17 November 2020
**Source: JP Morgan, 17 November 2020
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund managers and do not constitute financial advice. References to individual companies are for illustrative purposes only and are not a recommendation to buy or sell.