To say that the UK stock market is currently unloved would be an understatement. In the latest of a series of blows to the City’s status as a global financial centre, British microchip designer ARM elected to list on New York’s Nasdaq rather than on the London Stock Exchange – this despite a reported campaign led by Prime Minister Rishi Sunak to persuade the company to choose the City.
It’s a shocking statistic that in the past 23 years, the UK’s share of the global equity market has more than halved, from 11% of the Global index in 2000 to just 4.1% today. Granted, this still makes the UK the third largest equity market in the world, but it’s miles behind the US and a far cry from the past. According to a recent article in the FT, UK stock market capitalisation as a percentage of GDP has declined and is less than half that of the US and Canada.
With US companies trading on earnings more than double those in the UK – as measured by the former’s price-to-earnings ratio of 26.1 compared to the latter’s 10.7, who can blame an ambitious company owner wishing to cash in from choosing to list across the pond?
Figures from the London Stock Exchange confirm the downward trend, with 2,762 companies listed on the UK stock market in 2002, 2,078 in 2013 and 1,938 as of February 2023.
Pension funds have also reduced their exposure to UK equities, from 46.5% of total UK pension fund assets in 2003 to 22.2% for the period 2019-20, according to the Office for National Statistics.
In truth, it’s difficult to blame fund managers, overseas investors and even retail investors for abandoning the home market, when the S&P has returned 12.19% annualised over the past 10 years to 28 April 2023, compared to 5.98% and 6.08% for the FTSE 100 and FTSE 250, respectively.
Standing out from the crowd
Not all fund managers have followed the crowd, however. Jacob Reynolds, Courtiers Head of Asset Management, explained that far from turning its back on British stocks, Courtiers has increased its UK exposure, from 19% at the end of 2017 to 26% at the end of March this year.
Jacob says that BT Group, Marks & Spencer, Tesco and Centrica are all examples of UK stocks currently held by Courtiers.
According to Jacob, one attractive feature of the UK market has been the increasing number of UK firms who’ve been bought by foreign entrants, who’ve benefitted not only from lower valuations but also a weaker pound. “We’ve benefitted from this,” says Jacob, citing sausage casing manufacturer Devro, which Courtiers previously held before selling when news of its takeover precipitated a 60% rise in its share price.
Jacob says one of the reasons that the value of the UK market has fallen relative to other markets is because the former is on a huge discount. In other words, UK stocks are currently cheaper than stocks listed abroad – one way of measuring this is to compare the UK market’s trailing price-to-earnings ratio of 11.86 to the global market’s 17.48.
In contrast to the US, he says the UK market has missed out on the “big earnings” from the tech sector – the likes of Apple and Amazon that have pushed market valuations up, as well as the perception “that earnings can keep going up”.
It doesn’t surprise Jacob that people are looking to list in the US rather than the UK because as a public corporation “your objective is to maximise shareholder value.” But while companies may decide to list elsewhere, this doesn’t detract from the attractiveness of the UK market.
As a value investor, Jacob says it makes sense for Courtiers to “buy where you pay the least, which is exactly why we’ve been buying companies in the UK rather than the US.”
Low valuations apart, Jacob says there are other factors that make the UK appealing, including a stable regulatory environment, access to information and good oversight. The UK market also pays “a much better dividend than the S&P, and these can be reinvested to produce more dividends.”
The Investment Team is aware of the risk of ‘home bias’ (the tendency for investors to invest in their home market and to potentially overlook opportunities overseas) and so although Courtiers is overweight the UK, it’s “not hugely so”.
Jacob emphasises that Courtiers’ “investible universe” is global and that at some stage he expects the tendency for markets to return to their long term averages, will lead to a rise in UK valuations. At which point the Investment Team will take profits from the UK and “look to somewhere else for value.”
While the UK’s position as a global hub for equities has certainly diminished, Jacob’s message is that as a value investor, there are ample opportunities and reasons for Courtiers to take advantage of the UK stock market’s current unloved status.