A parting of ways
UK equities have fallen from favour and pessimism has taken hold. The BAML global fund manager April survey revealed that UK equities are considered the least attractive asset class across global markets. Looking at returns, over the past year or so, UK equity indices have lagged most other major equity markets.
Underlying the weakness is a marked bifurcation of the market. While most internationally-focused stocks have held up comparatively well, UK-domestic stocks are singularly unloved, trading at valuations last seen post the 2008 financial crisis. Historically, such circumstances have proved fertile hunting ground for stock-pickers. Indeed, our analysis reveals many of these stocks continue to benefit from strong fundamentals and a positive outlook, offering value to investors compared with the broader market.
What is weighing on investor sentiment?
Several factors are at play. In our view, the risks are overstated.
Brexit uncertainty
With under a year to go until the UK officially leaves the European Union (EU), investors are understandably perturbed by the lack of clarity over the terms of Britain’s withdrawal and its implications for the economy. However, history reminds us that companies adapt and innovate in response to change; we expect new opportunities and entities to emerge, as the UK’s relationship with Europe progresses and continues to evolve.
Economic slowdown
The recent slowdown in UK growth has contributed to negative sentiment. Nevertheless, the UK economy is still growing, bolstered by improving global activity. Additionally, unemployment has reached historically low levels and wage growth has finally started to rise.
Political instability
Investors are worried about the UK government’s weak position and the threat that a government led by Jeremy Corbyn would pose to the UK economy. However, not all stocks and sectors would be affected equally. With many UK companies deriving a significant portion of their earnings overseas, the UK stock market is not the UK economy. At the same time, we note recent polls suggest Mr Corbyn is failing to win new ground.
Watch our video on The case for UK equities.
Why invest in UK equities?
Not only do the negatives appear overstated, we believe there are outright positive reasons for investing in UK equities.
- Valuations are attractive.
- The UK offers a higher yield than most developed equity markets (gross dividend yield c. 3.7% versus 2.7% for Thomson Reuters Global Equity Index, as at 29 May 2018).
- International investors are underweight UK equities, yet corporate M&A activity has increased, implying there is genuine value to be found.
- With expectations so low, any slight improvement in sentiment is likely to catalyse flows back into UK equities.
- From a contrarian viewpoint, increasing exposure to UK equities offers greater return potential versus a consensual allocation.
- Consensual pessimism has created compelling opportunities for bottom-up stock-pickers. Our proven, non-consensual approach and full market coverage mean we are well-placed to take advantage of such opportunities, generating potential for outperformance for our clients.
Longer-term considerations
No less important to asset allocators, the UK equity market offers:
- High standards of corporate governance and the rule of law
- A wide range of quality companies across industry sectors
- Broad-based innovation
- A dividend-paying culture
- Access to global markets: reflecting one of the most open and global economies in the world, the UK stock market gives exposure beyond the UK.
Why Aberdeen Standard Investments for UK equities?
In pursuit of delivering successful investment outcomes, our funds benefit from the strength and depth of our resource and our rigorous bottom-up fundamental research. The effectiveness of our approach and the competence of our investment teams are reflected in the strong track records of performance that our broad range of UK equity funds has delivered for clients over many years.
To find out more about the case for UK equities click here.
Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.
The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. Past performance is not a guide to the future. Please refer to the Key Investor Information Document or the Prospectus for more details of the risks applicable to each fund.
All information, opinions and estimates in this document are those of Aberdeen Standard Investments, and constitute our best judgement as of the date indicated and may be superseded by subsequent market events or other reasons.
This material serves to provide general information and is not meant to be legal or tax advice for any particular investor, which can only be provided by qualified tax and legal counsel. The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested.
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