Everyone knows the UK equity market is cheap and unloved, but is anyone buying it yet?
Most institutional investors have been selling down over the past decade or more and now the UK is a mere pimple on the face of global equities. In fact, it is only companies buying their own shares that seemingly want the UK today.
If you look at the daily Regulatory News Service announcements from the London Stock Exchange, a large percentage are companies announcing new buybacks or stating how many shares they had bought the previous day.
According to Janus Henderson, a total of $64.2bn was spent on share buybacks in 2023, marginally lower than in 2022, but still accounting for $1 in every $17 spent globally — do not forget the UK is about 4 per cent of the MSCI World Index, so as a proportion of global buybacks the UK is punching above its weight.
Great opportunity
A few months back I sat down with the sharply attired Jupiter Income manager Adrian Gosden, who had some pertinent thoughts on the UK.
One of his arguments for the current great opportunity (obviously, paraphrasing slightly) was that virtually all institutional investors had now sold out of UK PLC and therefore companies buying back shares would find it harder fulfilling their orders. This would mean buying from reluctant sellers who would want higher prices to sell. It is obviously hard to gauge this, but his argument makes sense.
Let us talk valuation briefly. UK equities are cheap. It does not really matter what metric you use — the 12-month forward price-to-earnings ratio is 11.8 versus an average of 13.4 over the past decade. Free cash flow yield is currently 6.2 per cent versus the past 10-year average of 5.7 per cent.
Enterprise value/earnings before interest, tax, depreciation and amortisation is 7.1 against an average of 8. Admittedly, if you use price-to-book the FTSE 350 is slightly above trend, but do not let one stat ruin a good story.
Politics is always fun and the past decade has seen some pretty big upheavals in the UK, from the first coalition in a generation, to Brexit, to "Magic Grandpa" leading in the polls, followed swiftly by "PM BoJo", and then the shambles of the past few years of the Conservative administration.
Labour’s victory leaves a stable political landscape for at least five years, probably closer to 10 in reality. Its policies and tax raids might not be so helpful, but that should be a personal thing and less irksome for companies unless you are in the fossil fuel sector or a bank — both perennial whipping boys for politicians of all persuasion.
According to Allianz chief UK fund manager Richard Knight, a stable political base should not be underestimated. From better/closer/less fraught relations with the EU, to a lower turnover of ministers leading to more stable policy, these factors all add to a better backdrop for UK equities.
