In this year of elections, the UK will have made its choice by the time many of you will have found the time to read these pages. At the time of writing, the pollsters and bookmakers are predicting a seismic shift in our political landscape with a convincing Labour victory set to follow, so unless we’ve just been through the biggest electoral upset in generations, a little look back, then a look forward…
New Labour 1.0
In 1997, a young, dynamic, inspiring University student was waking up to the first Labour government in his living memory. By coincidence, I was at university that year too. Today, the UK is a very different place to the UK of the 1990’s. Britpop, Cool Britannica and Oasis v/s Blur were making headlines, but a recent viewing of perma-repeat ‘Four Weddings and a Funeral’, highlighted that despite the collective naval gazing of recent years, we have moved very far indeed in the intervening 31 years. Charles (aka Hugh Grant) wouldn’t have got lost so many times if he’d had Google Maps; Carrie would presumably have found it tougher to find a Scottish Conservative MP to marry; well-meaning, but bumbling Tom ‘Thunderbolt City’ was facing the challenge of navigating the family wealth through a dot-com crisis as well as a global financial crisis in the 14 years. As the chart below shows, in the years of the Labour government that followed, whilst markets faced their very real challenges, investors were still rewarded with solid returns, not least within the context that the Labour years included the global financial crisis and the verge of economic depression.
The chart shows the total return from FTSE All Share and S&P 500 from the date of the 1997 election to the 2010 election, which saw the Conservative-led coalition take power. The chart is in local currency terms, so a straight head-to-head footrace without confusing the matter with currency movements too. It may come as an unaccustomed surprise, but UK equities outperformed their US counterparts. It was marginal admittedly, but if there were a trend for the period, it was elsewhere. This was the era for emerging markets, the BRIC’s and globalisation.
The table below shows the performance of various Investment Association (IA) sectors, this time taking into account currency, whilst global emerging markets took home the gold medal, there was a not too shabby return from UK assets, particularly UK Index Linked Gilts, but also UK Equity Income.
New Labour 2.0
Trading elections does not make for a good investment strategy and we see it difficult to rationalise a significant portfolio rotation in advance of an election result, when psephologists insist the outcome looks decisive and relatively clear and therefore the chance for upset low.
We’d argue (and in fact have been for many years) that the case for UK assets remains. At this point, we could be levelled with the accusation that ‘even a stopped clock tells the right time twice a day’.
UK: Unloved, under-valued and under-represented in global portfolios.
Unloved
UK assets have been under a cloud since 2016 and political uncertainty has made the UK market an easy one to ignore, first as the post-referendum relationship with the EU was unclear, then as the Conservative leadership jumped on a merry-go round of Prime Ministers and Chancellors. The election will not trigger a mass re-evaluation but removing some of the political drama that we’ve had for 8 years now, will hopefully lessen one of the more obvious obstacles.
In the meantime, UK retail investors are following a clear trend, reducing UK allocations and buying passive, predominantly to US or global equity markets. According to Calastone (a global funds network who also provide data on fund flows), UK investors have withdrawn £22.4bn from UK equity focused funds in the 36 months to the end of May this year.
Undervalued
UK equities trade at an attractive valuation versus their own history and against global peers. On a basic valuation measure, forward price/earnings, UK equities are trading at around 11.5x, some way below their 15-year median. Whereas, US equities are trading at over 21x, well above their 15-year average, they clearly do so with a better earnings growth profile than the UK. Whether the premium for those earnings is justified or not, well, we can argue that point. But compare the UK to Europe with a not-too dissimilar earnings profile (and now arguably a higher element of political risk) and you should at least question why European equities are being valued with a 20% premium to the UK.
In the meantime, UK companies are quietly paying dividends and carrying out share buybacks at levels that make the buyback and dividend yield of the UK at a level that dwarfs their European and US counterparts. Patience may indeed become a virtue. It’s not just UK equities, even UK gilts are trading at yields that look attractive again and the sector performance table above does highlight the potential for fixed income to deliver worthy returns over the long-haul.
Under-represented
But I’ve been overseas
And I’ve been havin’ dreams
L’amour de ma vie
Love so bittersweet, mm
Open up the door for me, for me
Billie Eilish, Bittersuite
Billie may be overstating it a little, but it is very fair to say global asset allocators have side-stepped the UK for many years. We have talked before about the long-term shift, particularly in the large corporate pension market, for equity allocations to move towards tracking global equity indices, in which the UK is only a small part. In a recent meeting with one of the UK equity managers this month, he was honestly frank that UK retail investors may well not come back and if he had his time again, other equity markets may be a better place to start your career nowadays, but he also admitted the hum of overseas investors snooping around UK assets was beginning to get louder.
