Ignore the bad news in the media, the UK is bouncing back in 2023 and value stocks are set to benefit, Clive Beagles manager of the JOHCM Equity Income Fund tells Rob Kingsbury.
While growth has been almost the only game in town for the past decade, the more traditional, value-orientated UK market is now resurging, and investors have the opportunity to ride the wave if they get in early, suggests Clive Beagles manager of the JOHCM Equity Income Fund.
“Investors have been chasing global funds which have benefitted from the big techs and others going up, but investors need to be looking at where markets will go from here,” he argues. “For us, UK value is so compelling now compared to the international markets. And we’re seeing a similar value picture in Europe, which is why we think the UK and Europe have started this year relatively strongly.”
The change is recognition that markets are approaching the end of the monetary tightening phase, he believes. “Economies haven’t imploded, wholesale energy prices are beginning to come down which takes away the trail risk from an economic activities point of view, and there is a change in the markets away from mega cap US to other better value parts of the stock markets.
“Whilst value stocks have begun to perform better, we think this process has only just begun, and we have many years ahead of us as we re-adjustment back to a normal equilibrium, as the memory of zero interest rates for over a decade begins to fade.”
Cyclicals versus defensives
When charting the relative performance of cyclicals versus defensives, he highlights that in late 2022 cyclicals were at their lowest rating against defensive for 50 years. “The global economy is not perfect but there is no way we are in the worst economic position for 50 years!” he says. “This does not mean our fund will shifts to cyclicals over defensive but there’s an opportunity to be had.”
He believes many larger growth stocks are still very highly rated (partly driven by the decade of low discount rates) and in some cases, they carry “quite a considerable amount of debt which is now becoming more expensive. So to some degree I think we’re going to see adjustments, with parts of the market coming down as others are going up. Consequently, we believe investing in Index funds at the moment is quite dangerous.”
The valuation gap between the value stocks in the fund and those considered to be ‘growth’, either in the UK Index or elsewhere in the world, “remains extraordinarily wide” but will begin to close, he says.
“I’ve only seen a situation like this three times before; at the bottom of the financial crisis in 2007/08, the worst parts of the pandemic and to some extent in 1999/2000 when technology stocks were shooting up and everything else was quite cheap.
“But it’s hard to get people to see that the UK is a market worth investing in and that value as a style has duration. People want to see things go up before they believe what you’re saying and there is a danger that they miss the first third of the rise.
Investors need to take advantage of this opportunity, he suggests, “as these circumstances will not last forever”.
The JOHCM Equity Income Fund aims to generate long-term capital and income growth through active management of a portfolio of UK listed equities. Currently, the diversified portfolio consists of 60 stocks, multi-cap with different sectors – around 55% in FTSE 100, 25% in mid cap and 20% in small caps (companies less than £600m) Beagles says – generating around 5.5% dividend yield so far this year. The running yield on the fund is circa 5.3%.
