“The times, they are a-changin’.” Bob Dylan probably wasn’t referring to UK equities when he wrote this seminal lyric back in the sixties. But the fact remains, the troubadour’s words could hardly be more apt in 2023. (Written by Fred Mahon and Rory Campbell-Lamerton, co-managers of the Church House UK Equity Growth Fund)
Ongoing outflows are currently creating a plethora of opportunities for long-term returns among quality British companies. Now, it’s down to investors to look past the macro uncertainty and make the most of them.
Changing tides
Beginning with the reality, and UK equities have suffered significantly for several years now.
The recent problems can be traced back to the Brexit vote several years ago. But more recently, we’ve also experienced–among other things–the coronavirus pandemic and Liz Truss’ disastrous mini-budget.
Throw it all together, and you’ve got what can only be described as a perfect storm for a period of negative sentiment.
Data from Calastone paints 2022 as a particularly torrid year for UK equity fund flows. Every month saw net-selling, and this culminated in record outflows of around £8.4 billion for the 12-month period.
The underlying reasons for this are varied.
Some speculate that it could come down to the lack of long-term clarity around the UK’s decision to break away from Europe, its nearest and largest trading partner. Meanwhile, others believe many investors are awaiting a return to the “normal” of ultra-low interest rates and borrowing.
But whatever the reason, the truth is that UK equities have undoubtedly become inexpensive compared to their global peers since 2016. Just look at the table below, which compares the P/E ratios of several global indexes to the FTSE 100 as at 31 December 2022….
| Market | P/E (Yr+1 est) at 31Dec22 |
| S&P 500 | 16.4x |
| CAC 50 | 11.1x |
| XETRA DAX | 10.9x |
| TOPIX | 11.6x |
| FTSE 100 | 9.8x |
Likewise, we are seeing differing valuations of like-for-like companies, as highlighted by the data below…
| Peer group comparison – Est P/E (Yr+1) | ||||
| Smith & Nephew | 18.5x | vs | Stryker Corp | 28.3x |
| Schroders | 13.8x | vs | Blackrock Inc | 21.5x |
| Unilever | 18.6x | vs | Nestlé | 24.0x |
| Diageo | 21.4x | vs | Brown Forman | 36.0x |
Alone, these tables don’t necessarily suggest the UK equity market is undervalued–it could be “cheap” for a good reason.
But add in the fact we’ve seen a raft of international bids for FTSE 100 companies such as Aveva, Avast, Meggitt, and Morrisons (to name but a few), and it appears to confirm our belief that many unique, quality businesses are trading in London, and their lower valuations (coupled with a weaker pound) are making now a good time to buy.
After all, post-Christmas trading statements have been remarkably bullish for many UK names, with management teams making positive noises about their prospects for 2023.
Greggs, for example, is continuing to see sales soar, mitigating its rising input costs. Likewise, JD Sports Fashion announced a bumper festive period, with year-on-year sales growth of 20% surprising even the most bullish of analysts. Meanwhile, at the end of 2022, Beazley was able to raise an enormous £385 million while Ashtead Group announced that full-year results were on track to exceed expectations.
Changing mindsets
The case studies go on…
But the bottom line is, despite the travails of 2022, the UK is home to some incredible, successful and resilient international and domestic companies.
It’s impossible to predict the direction of market trade winds for the coming year and trying to is a largely pointless exercise.
Instead, we believe that investors need to start seeing past the UK’s political worries and focus on identifying high quality domestic businesses that operate successfully in unique circumstances and can grow at steady rates over the long-term.
This, in our opinion, is the best way to deploy capital.
