The UK equity market looks very inexpensive as a whole, especially when compared with the US equity market. This observation has been made repeatedly over the past few years, but has not stopped continued underperformance from UK equities. Perhaps it is worth taking a closer look.
First, the main reason the UK index looks cheap is due to its composition: lots of oil stocks, miners and banks trade on low earnings multiples in every market. Also the UK has few "quality growth stocks" including technology stocks.
The few it has are valued around the same high multiples as international peers: for instance, Sage group trades on 36 times last years’ earnings, and Intuit, its US equivalent, trades on 42 times last year’s announced earnings.
Indeed the quality growth stocks in the UK market have generally performed well in recent years alongside similar US stocks: Relx, Sage, Experian, Next.
Having spent most of my career running global equity funds, I have found the managers of the above companies amongst the best in the world.
However, I cannot say that for the average large UK company. I am afraid that a number of UK company management teams seem to be lacking entrepreneurial energy, inclined towards vague strategy plans (lacking hard targets) and a bit of a club.
At the moment there seems to be a long list of the UK’s largest companies that lack a long-term plan, and many likely to change leadership teams.
From Vodafone to BP to HSBC to ICA (British Airways), ITV, I could go on.
It can seem like football management – the same poorly performing stocks regularly changing managers.
Some investors argue that these stocks have recovery potential (especially on the valuation), but few would argue there is a clear strategy for these companies to succeed long term. Ultimately this comes down to management quality.
The Post Office scandal shows, amongst other things, how poor governance structures can allow a management team to double up not just on poor business practices, but even immoral policies. Listed companies should be better than that if held accountable by shareholders.
In the past, what used to be called "shareholder value" focused on the financial success of companies and the pay of management.
Recent trends have broadened the assessment to include a wide range of environmental and social issues as well as governance matters.
This could lead to management of large UK companies being seen as "successful" if they hit, for instance, diversity and inclusion targets while missing earnings and growth targets.
Large shareholders should be careful what they wish for: if management teams believe they get shareholder approval through hitting, for instance, D&I targets, that is what they will do – they are much easier to control than financial targets.
The good news for the UK is that there are some new issues and placements on the way – not least the Treasury’s plan to sell part of their holding in NatWest bank.
The recently departed chief executive kept the confidence of her board mainly through her successes in D&I and management of the brand – questionable board assessments in both cases.
