23.08 Liontrust Views Summer 2023 Literature (Single) - Flipbook - Page 11
The UK stock market has been in the
doldrums in recent years, not helped by the
political and economic upheaval that began
in 2016 with Brexit. The impact of Brexit
is still being felt on trade and investment,
while high energy costs and stubbornly high
inflation exacerbate the situation.
Add to the mix the high turnover
of prime ministers in the UK
in a remarkably short period
and the subsequent domestic
uncertainty, and it would not be
a stretch to say the UK has been
under a cloud since 2016.
Yet while sentiment about the UK
continues to be relatively poor, the
good news is that this could create
opportunities for investors who are
prepared to back the UK.
According to a study by Jonathan Haskel,
a member of the Bank of England’s
Monetary Policy Committee, the UK has
lost a staggering £29 billion in business
investment since Brexit.
However, a June report by EY, the EY
2023 UK Attractiveness Survey, suggests
that while the number of foreign direct
investment (FDI) projects in the UK fell 6.4%
in 2022 compared to 2021, the UK still
ranks as the second country in Europe for
FDI, behind France but ahead of Germany.
Reasons for optimism
In recent years, UK stocks have broadly
underperformed global equities, accounting
in part for their ongoing unpopularity. Yet in
2022, the FTSE 100 outperformed many of
its international peers and the beginning of this
year saw a rebound in UK equities, thanks in
large part to the energy rally and value rotation.
Disappointingly, they once again lagged in the
second quarter due to weak commodity prices
and the strength of sterling.
A key issue for the UK is that many of
its dominant industries have also been
unloved in recent times. For example, UK
banks have had a tough time with fears of
contagion from the collapse of Silicon Valley
Bank and the rescue of Credit Suisse after
intervention from the Swiss government.
Consumer discretionary stocks (firms selling
non-essential items) have also struggled as
people reduce spending in difficult economic
times. Meanwhile, firms that lag from an
Environmental, Social and Governance
(ESG) perspective have also suffered.
Yet in July 2023, the FTSE 100 index rose
after UK banks passed their annual stress
test – a requirement of the Bank of England
to ensure banks are strong enough to cope
financially if and/
or when economic
conditions deteriorate.
This shows the value
of measures put in
place by regulators
following the Global
Financial Crisis which
mean UK banks are
in a far stronger financial position thanks
to increased capital asset ratios than they
were then.
Inflation
The persistently high inflationary environment
is seen by many as a reason to avoid
backing British, but this is arguably taking a
short-term view. The UK is far from the only
country to be experiencing high inflation,
albeit inflation in Europe fell from over 6% to
It may be fashionable to write
the UK off, but investors could
do so at their own expense.
5.5% in June. Meanwhile, the US recently
reported an easing of inflation, although
core CPI inflation remains higher than the
government would like.
James Klempster, Deputy Head of MultiAsset at Liontrust, argues that currently the
‘valuations of financials are attractive’ and
could represent an interesting opportunity.
He adds: “Investors often focus on the
negatives as this is easier than looking more
closely for the undoubted positives, but
this means they could be missing potential
opportunities for value.”
With the impact of recent rate rises yet to
be fully felt, combined with the government
and Bank of England’s firm commitment to
bringing inflation down as a priority, experts
believe we are likely to see inflation begin
to fall this year, which would be welcome
news for many investors.
International exposure
Investing in the FTSE 100 index also gives
exposure to international markets other
than the UK. This is because many of the
companies listed on it conduct business
globally, thereby offering investors the
chance to benefit from other markets but
without the foreign exchange currency risk.
Democracy and stability
Despite the unusually chaotic political
period seen in 2022 – with a certain prime
minister being outlasted by a lettuce – the
stability of the UK is a factor that should not
be disregarded. Not only is the UK one of
the longest-standing democracies, it is also
one of the five largest economies in the
world. This should give investors peace of
mind to some degree.
As James Klempster says: “If you look at the
FTSE 100, it is a basket of companies mainly
domiciled in the UK but with three-quarters
of their profits coming from overseas – so
there are clearly benefits there. This is a
flexible relationship.”
Benefit from the discount
While the UK stock market has picked up
this year, relative to many international
markets, it is still deeply discounted. With
valuations of the UK and companies at such
low rates, it clearly offers an opportunity for
investors who are prepared to jump in now
to benefit over the mid to longer term.
Stock Market
12m forward PE
UK
US
Europe
ex UK
Japan
10.8
22.2
12.3
18.6
Source: Bloomberg, 17.07.23
To back or not to back?
For investors currently weighing up whether
to back British or look further afield, it is
worth bearing in mind the bargains that can
come with buying unloved goods.
As James Klempster concludes: “When
something is unloved, it can often become
good value, and the UK is unloved. There
is no doubt that it has been a difficult time
politically and there has been business
uncertainty but there are a lot of opportunities
and value there for investors.
“It may be fashionable to write the UK
off, but investors could do so at their own
expense.”
LIONTRUST VIEWS – SUMMER
11
