Written by Chris Ayton

As well publicised, the UK equity market has been unloved for many years now, particularly if you look at the more domestic mid and small capitalization universe.

Although clearly biased, a sizeable group of leaders and fund managers in the UK investment industry have been lobbying the Treasury to provide more encouragement for UK investors to invest in UK listed companies. Why, they argue, should the Treasury provide the same tax break to UK retail investors for providing capital to overseas companies like Apple or Tesla, as they get for providing capital to UK listed companies?  This has prompted the Chancellor, in his Budget last week, to announce the launch of a new British ISA that will provide an additional £5,000 of tax-free ISA allowance to invest solely in UK equities or UK equity funds.

In reality, the flows that are likely to result from this measure are unlikely to significantly move the needle in monetary terms, however it is more about elevating the debate about how to get UK investors, retail and institutional, to better support UK businesses.  More critical in this crusade is likely to be the government’s efforts to get the UK pension fund industry to also raise its allocation to UK companies.  When I started in the investment industry, it was not unusual for UK pension funds to have 40% or more of their assets in UK equities.  Today that figure, according to data from the Capital Markets Industry Taskforce, is just 2.7%.  Contrast this to Australian pension funds that invest 38% of their assets in Australian equities, France that allocates 26% to French companies, Japan that allocates 49% to Japanese equities and Italian pension funds that allocate 41% to its domestic market.  Less well publicised than the new British ISA, was the announcement that, going forward, UK pension funds will be forced to publish how much they have allocated to UK companies, with the additional suggestion from the government that further action will be taken if allocations are not increasing.

In the meantime, with UK equities trading at extremely cheap valuations, corporate UK is seemingly taking matters into its own hands.  A standout feature of recent company earnings announcements from many of our UK equity managers’ portfolio holdings has been the prevalence of share buybacks, i.e. companies using their profits to buy their own undervalued shares, thereby increasing Earnings (profit) Per Share for the remaining shareholders.

We are also seeing a notable uptick in Mergers & Acquisitions, with UK and Overseas companies seeking to acquire UK listed companies at what they believe to be highly attractive prices. To name a few, we’ve seen Nationwide bid for Virgin Money (sending the shares up 35%), Belgian insurer Ageas making a bid for Direct Line at a 40% premium, UK logistics firm, Wincanton, accepting an offer from a US peer at 100% premium, Spirent Communications accepting a bid from a US rival at a 60% premium and UK retailer, Currys, rejecting a bid from a US private equity firm at a 40% premium, saying this significantly undervalued the company.

We are hopeful this is just the start of a long overdue revitalisation of the UK equity market.  We are overweight the UK equity market in our multi-asset portfolios and we are encouraged to see an increasing number of routes that this value could get realised going forward.


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