In the late afternoon of the 23rd June 2016, dark clouds circled the City of London. The lightning and torrential downpours created a sense of ominous foreboding in me as I sat at my Clerkenwell desk. The trains were going to be an absolute nightmare.
I recall scrambling on a tube at Blackfriars to Cannon St – a mere two stops, but plenty of time to get drenched if I walked. The tube pulled in to Mansion House and whilst my eyes didn’t deceive me, my brain demanded visual retakes as the doors opened and a waterfall of rain crashed in to the carriage and willing commuters had to walk through the Iguazu Falls to step on to the platform.
With recent polling looking like a ‘Remain’ vote would hold sway, I felt relaxed that I should still get home in plenty of time to place my vote in the referendum.
The storms passed, the streets and flooded homes dried out, but UK equities started a prolonged period of floating adrift from their global peers as Brexit uncertainty, heightened political risk, a weakening currency and a poor early response to the pandemic all made UK equities virtual pariahs to global stock investors.
Five years on from that vote much has changed. We now have “our friends” in Europe, a government with a big majority and a vaccine roll out that is at the vanguard of our peers. For the UK equity market however, much has stayed the same as UK equities remain at discounts to the global peer group and only tentative signs that global asset allocators are prepared to dip their toes back in the water. Over recent years we have reduced UK equities as a percentage of our overall equity allocations, but recognise we still held too much at points early last year. The question going forward is how much to continue to hold?
The FTSE 100 is a 19th century relic according to the hugely respected and recently retired James Anderson from Baillie Gifford, who managed the Scottish Mortgage Investment Trust, itself launched in 1909 but moulded by Anderson in to a global growth orientated investment fund with leading positions in the likes of Tencent, Amazon and Tesla. There is a whiff of truth in this with virtually no technology companies present, but plenty of ‘old world’ oil and energy, financials and banks and those companies that now form what is collectively considered ‘value’. What we are also witnessing is companies listed in the UK still remain trading at a discount to equivalent companies that are listed overseas and, whilst fund manager surveys certainly don’t say UK equities are in the loved camp, they are becoming less hated! We anticipate that there is likely to be some further recovery from this Brexit hangover in time.
Structural challenges remain in the UK equity market with the continued dominance of companies in ‘value’ sectors that are likely to remain unloved for decades. Low interest rates and high levels of regulation will pin back bank profitability. For mining and energy companies, rising global temperatures are beginning to be reflected in Court too. As witnessed in the Dutch Courts recently, where Royal Dutch Shell was ordered to cut back its global carbon emissions by 2030, energy companies face an increase in climate change litigation drawing similarities to the slow decline of tobacco companies in the face of a wall of court proceedings against them as society weaned itself off their deadly addiction too.
Markets rotate and UK equities will have their day in the sun again, but with some long-term structural headwinds at play set to hinder some of the biggest sectors in the UK market, UK equities will remain present, but are likely to remain a lower percentage of our client portfolios for the years ahead.