What’s happening to UK plc? Here six managers from JO Hambro Capital Management provide their insight into the UK equities market – past, present and future
The past
Political uncertainty has made the UK stock market a pariah in recent years. Starting with the tremors of the Scottish referendum and then the Brexit earthquake of 2016, including the subsequent tortuous negotiations and fluctuating possible outcomes over the next four years, investors have had plenty of reasons to shun UK stocks. Throw in a pandemic that disproportionately affected the UK, and it is easy to see why allocations to UK equities among international investors have been at multi-year lows.
Indeed, J O Hambro Capital Management’s UK Profit Index, which tracks the fortunes of the whole UK stock market every six months, found the pandemic caused a record decline in UK plc revenues, down £349bn or 19% in the first 12 months covering the outbreak (April 2020 to March 2021). Profits were even harder hit, down 61% to £55.3bn.
Low weightings to UK stocks accompany low valuations and mean the UK now looks very attractive in a global context. Compared to the US and Europe, UK stocks are around a quarter and a seventh cheaper respectively based on forward price/earnings ratios. With low valuations and a solid rebound underway, now is an exciting time to be investing in the UK stock market.
The present
A changing mood
Insight from James Lowen and Clive Beagles, Senior Fund Managers of J O Hambro Capital Management’s UK Equity Income Fund
The change of mood in company boardrooms is palpable at present. The rebound from the Covid-19 recession, the economic support from the Bank of England and the Treasury, and a sense of clarity about what Brexit finally means, have unleashed an appetite to capitalise on the upswing by focusing on what management teams can do better – whether on driving sales, taking market share, controlling costs, finding attractive acquisitions or making new investments. Commodities, financials, construction, consumer discretionary stocks and a few global cyclicals, like WPP, are all to play for over the next 12-18 months.
Business transformation
Insight from Alex Savvides, Senior Fund Manager of J O Hambro Capital Management’s UK Dynamic Fund
Companies with a solid transformation strategy, carried out well, can reap major benefits and create a real investment opportunity. They can become better companies, turning them from backward-looking organisations saddled with problems to forward-looking firms with clear growth prospects. Right now, we currently see a lot of value in media, in broadcasting, advertising, print and online, as companies
dispose of underperforming assets and focus on those that will prosper in the new media landscape.
Growth
Insight from Mark Costar and Vishal Bhatia, Senior Fund Managers of J O Hambro Capital Management’s UK Growth Fund
We look for undiscovered, mispriced growth assets, for companies that are fundamentally misunderstood. Covid-19 has wrought disruption and change, which we believe the market still hasn’t fully recognised or priced correctly. This can mean changed working practices, cyber security, accelerated digital transformation for offices, retail and even healthcare. And there has been no let-up in the green revolution.
We own a host of very attractive, wrongly-priced assets that are exposed to these important structural changes and many others. There are, for example, far more high-growth tech assets on the London market than people realise, often because they are buried inside other companies.
We think growth opportunities in the UK will continue to surprise on the upside, a scenario that is nowhere close to being discounted by the valuations on offer.
All eyes on ESG
Insight from Rachel Reutter, Senior Fund Manager of J O Hambro Capital Management’s UK Opportunities Fund
Thinking long term and investing in companies with attractive and sustainable business models that want to invest their cash for future growth, rather than devote it to dividends and share buybacks, is the name of the game. When it comes to sustainability, there are financial as well as societal benefits in taking this approach. Household product manufacturers that are committed to responsible consumer choices and eco-shopping behaviours will benefit the most in the future, as we know globally people are more conscious of single-use plastics and want alternatives.
The future
Recessions often bring real clarity to company management teams, presenting opportunities for renewal and the energy to do things leaner, better and faster – and the pandemic is no different.
Extremely loose monetary and fiscal policy, supported by pent-up consumer demand backed by pandemic-forced savings, rising employment and wages, and a buoyant housing market, suggest the recovery has some way to run. This means that profits are now growing very fast, certainly much faster than previous consensus expectations.
Insights from J O Hambro’s UK Profit Index research indicates UK plc earnings could roughly double to about £110bn by March 2022, and they could regain their pre-pandemic levels by March 2023 – making UK equities a highly attractive long-term proposition for investors from this year onwards.
This article was first published in the September 2021 issue of Professional Paraplanner.
