UK equities: the song remains the same
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UK equities: the song remains the same

- Despite the cost-of-living crisis we believe the gloom overhanging the UK economy is overdone

- UK stocks continue to trade at a discount of around 30% to global equities, which is likely to attract further merger and acquisition acitivity

- We remain true to our enduring style of high-conviction value investing, which we believe will continue to serve us well over time

In late summer 2022 we wrote a viewpoint1 citing Ian Dury & The Blockheads’ 1979 hit, “Reasons to be cheerful, part 3”. In it we argued that despite the prospect of public sector and other strikes, and hardship for many families and consumers – both of which played out – things were not as bad as they seemed for UK plc. UK equities were under-valued, the economy was more resilient than it seemed, and the power of UK dividend payments would continue to boost returns for investors.

Now, as the summer of 2023 gets underway, we have seen much change. Three US banks and a Swiss bank have failed2. Equity markets have rallied and then corrected, reminding us of the danger of whiplash investing. And Richard Colwell, our previous Head of UK equities, retired after a successful 25 years in asset management.

At this point I’d like to cite another 70s rock band, Led Zeppelin, and in particular their 1976 album The Song Remains the Same. Because despite this change – both macro and internal – our views remain the same, our investment style remains the same, and the rest of the UK equities team remains the same. Richard and I worked closely for 17 years, seven of which were at Columbia Threadneedle Investments. We are both patient investors, confident to wait for a company’s intrinsic long-term value to be released. No two fund managers are the same, but this style is entirely embedded in how we run money.

Banks take a beating
In the past four months the market has been on a round trip from initial new year animal spirits to sobering up. Money initially moved into banks and cyclical stocks before core US inflation proved stickier than the market had anticipated, suggesting that US interest rates would stay higher for longer and US gross domestic product would fall in the second and third quarters. Then, of course, came the news in March that Silicon Valley Bank and Signature Bank had failed, followed by the Credit Suisse rescue and, most recently, First Republic.

Bank stocks took a proper beating and oil stocks retreated as a weaker economy would mean lower oil prices. But it is worth reminding readers that as contrarian investors with a laser focus on company fundamentals to target strong risk-adjusted returns, we have limited exposure to banks, oil and mining on the UK equities desk. Never say never, but they’re clearly not contrarian ideas having previously been fantastic performers.

Instead, our bottom-up style means we select shares on their merits, irrespective of what is in the index and other people own. Over the past six months we have tilted more into domestic cyclical companies with valuations below book value and without much debt. However, this is very much an iteration of what we’ve always done.

More of the same

We echo much of what we wrote last summer. In contrast to the US, the UK now looks likely to avoid a recession3 and nominal GDP is expected to exceed the US over 2023-24 – an outperformance that has rarely happened in the past two decades. The UK’s cost-of-living crisis also appears set to ease, as the recent big fall in energy prices will pass through to gas and electricity. Even a 20% fall would bring average household bills back below £2,000 a year4.

Turning to the UK equity market, stocks are still trading at a discount of around 30% to global equities when valued on a 12-month forward price/earnings basis5 Showing just how cheap the UK stock market is, takeover bids are continuing for reasonably sized businesses. These remain attractive to private equity investors who have raised a lot of money that they need to invest, despite the high cost of borrowing through leveraged finance to support bids and the typical 50% takeover premium that bidders pay. The UK is cheap, it’s got a common language, highly respected regulatory and accounting standards, and strong supervisory bodies. With the slowing US economy and its high valuations, why wouldn’t US companies look at UK stocks?

Looking ahead

So, much has changed – but so much remains the same. We remain positive but realistic about the UK economy, going against the fashion for gloom. We remain convinced that the long-term value in many of the UK companies in our portfolios will be realised over time. And we remain a team of high-conviction investors committed to long-term ownership and quality stewardship.

5 June 2023
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UK equities: the song remains the same

1 Columbia Threadneedle Investments, UK equities: winter of discontent?!, September 2022

2 The Guardian, JP Morgan boss plays down risk of crisis after second biggest bank failure in US history, 2 May 2023

3 BBC.co.uk, IMF expects UK economy to avoid recession, 23 May 2023

4 Cornwall Insight price cap predictions for July and October 2023

5 Bloomberg, as at May 2023

 

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and
may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香 港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and
may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香 港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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