UK equities present a compelling investment opportunity, supported by strong recent performance and encouraging market conditions.
Over the past six months the FTSE All Share has outperformed both the Stoxx 600 and the S&P 500, sterling denominated. In our view, the UK market still remains good value versus other developed markets.
The combination of poor relative returns over the past seven to eight years (leading to a significant valuation discount), the relative outlook for many UK-listed companies and the greater stability we now see in the institutions of the UK following the election versus other countries, gives us confidence that over the medium to long term return opportunities could be significant.
Macro backdrop
The outcome of the general election in the UK was largely as polls had predicted. Since then, the Labour government’s messaging remains focused around their commitment to boost economic growth while warning of fiscal discipline ahead of the October Budget.
While we acknowledge the considerable speculation in the media regarding potential new taxes ahead of the October Budget, we believe this will only cause a short-term dip in enthusiasm for UK equities.
In the medium to long term, it is likely to be no more than a temporary pause. Actual delivery and success or failure in their growth agenda will take time but in our view the easiest characteristic to demonstrate will be political stability, particularly when compared to other parts of the world.
After a prolonged phase of political instability, a period of calm is likely to be embraced by UK business. This stability may also attract the attention of international investors, as the UK economy seems to be moving away from more populist policies, in contrast to some other Western economies.
The UK could move from being seen as a country plagued by political volatility to a relative safe haven.
Over recent months, the case for UK equities has been further strengthened by the start of the rate-cutting cycle, combined with robust real wage growth and a significant improvement in consumer confidence.
As UK investors return from their summer break, many will note the pound's relative strength against the dollar. Historically, there has been a strong correlation between the domestically focused FTSE 250 and a strong pound, reinforcing our optimism for the UK market as we enter a new phase of the rate cycle.
It is not just about UK domestic exposure though. Many international companies are listed in the UK and a significant proportion of these are priced at a discount to their international peers. A geographically diversified earnings stream, providing broad exposure beyond the UK, could attract investors back to the UK equity market.
