The Good, the Bad and the UK Stock Market
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The Good, the Bad and the UK Stock Market

After an exceptional 2022, the UK reverted to recent type with a big underperformance in 2023. With money continuing to disappear from the market, two potential catalysts for change have emerged

  • After an exceptional 2022, the UK reverted to recent type with a big underperformance in 2023, while the S&P and the eurozone hit all-time highs
  • With money continuing to disappear from the UK market, two potential catalysts for change have emerged in the form of M&A and retail inflows
  • We remain conviction investors who will look through the noise, avoid the whipsaw momentum trades and continue our deep and fundamental research to target strong, risk-adjusted returns

With global stock markets all about the Magnificent Seven1, investing in the UK over the past few years has been a little more The Good, The Bad and The Ugly. But what’s that on the horizon … it’s a bold new narrative riding into town!

Setting the scene

In 2022, with US tech reminding everybody that it can do cyclicality too, the UK stock market was the best performing developed market (The Good). Moving into 2023 brought worries over inflation and concerns about economic growth. The UK housing market and economy suffered from the impact of higher interest rates, more expensive mortgages and the subsequent hit to consumer spending that saw a sizeable pullback in spending on big ticket items (The Bad).

As we get further into 2024, however, perhaps we will sidestep The Ugly. The cost-of-living crisis is easing, the UK dallied with recession at the end of 2023 but looks to have immediately pulled out of it, and economic indicators are beginning to point in the right direction. So, while we’re not in a boom, or a High Noon period to extend the Western metaphor, we’re at least not worrying about how much further things could fall.

As 2023 came to a close the UK market found itself at 40-year lows against the S&P 500 and a 25-year low against the MSCI World Index (Figure 1).

Figure 1: UK equities appear cheap relative to their own history and to the rest of the world
Figure 1 UK equities appear cheap relative to their own history and to the rest of the world

Source: Bloomberg, Factset, Investec Equities, 31 December 2023

So, if the general direction is up then what would be undeniably helpful would be to have money coming back to reinvest in listed shares. And there are two things which could be a positive catalyst for the UK market.

Catalyst one: M&A

First, the return of mergers and acquisitions (M&A), which effectively disappeared in 2023. As we have talked about many times, the FTSE 100 has lots of companies listed in it that don’t have anything to do with the UK economy, and their valuations are very low compared to their competitors. So it was a surprise that there was next to no M&A last year.

But there’s nothing like higher animal spirits for executive teams to take advantage of a situation. So in 2024, with debt markets continuing to reopen, we have already seen seven quite sizable bids including Virgin Money, Direct Line and DS Smith. All have been at least a 37% premium to the undisturbed share prices, and one or two have been spectacular.2 Wincanton, a little-known transport and logistics company which we hold in our portfolios, had a 104% premium. Telecoms testing services provider Spirent, meanwhile, was a 62% premium.3

Share prices got hit in 2023 on tougher trading, with investors caught up in the momentum and trajectory of short-term earnings and clustering around short positions or selling existing positions because shares were moving down. But we believe there is no information in share prices – it’s just a daily spot price that doesn’t necessarily tell you anything about the quality of the company, its long-term future returns or its intrinsic value as a business.

Below the radar of this daily noise of the flow trades of miners, banks and oils we think there is huge value in the UK. And what is coming through in this resumption of M&A activity is a reflection that the intrinsic value of these businesses is much higher than share prices are reflecting.

There is certainly a conversation to be had about declining numbers of listed companies in the UK, but today’s reality is that it is possible to get extremely strong returns from a market that has been written off, which is exciting.

Catalyst two: Budget bounce

In the recent Budget was a proposal for a British Individual Savings Account (ISA) of £5,000 per person.4 There are 800,000 people in the country that maximise their existing £20,000 ISA allowance.5 If they all take up the additional allocation that would be £4 billion coming into the market. In a £2 trillion market that is only 0.2%, but year-on-year compounding would be very helpful. The ISA is also a way of getting retail investors to look again at the UK stock market, which is crucial.

Also in the Budget was a proposal for the government to hold defined contribution and public sector pension schemes to account over their UK allocations, with the intention that “the government will review what further action should be taken if this data does not demonstrate that UK equity allocations are increasing.”6 The UK has hitherto been quite unusual in not enforcing this. In France and Italy, for example, you must hold a certain percentage of French and Italian equities, while in America you get tax benefits from investing in US-listed stocks.

Positioning ourselves

Although these things are not a silver bullet to turn the market around, they should be helpful. And whether we see this widespread mis-valuation of UK equities persist, or more money starts to flow back into the market, we believe our style of investing means we should benefit.

We remain patient, conviction investors. We have the grit, the True Grit (that’s the last Western mention, I promise!) to focus on the bottom-up, we do detailed, thorough research into company fundamentals and try to identify long-term value with a three- to five-year investment horizon. We stand back from the noise of the flow trades and the bulge bracket daily positioning. Buying equities involves long-term ownership and quality stewardship, and short-term losses will not fundamentally affect long-term intrinsic value. We will stay the course to see the strong, risk-adjusted returns realised.

28 March 2024
Jeremy Smith
Jeremy Smith
Co-Head of UK Equities
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The Good, the Bad and the UK Stock Market

1 Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. The mention of stocks is not a recommendation to deal
2 The last closing price before an offer announcement. Past performance is not a guide to future performance
3 RNS Newswire, March 2024. The mention of stocks is not a recommendation to deal
4 Gov.uk, Open Consultation UK Isa, 6 March 2024
5 AJ Bell, March 2024
6 Local Government Association, Spring Budget 2024: On-the-day briefing, 6 March 2024

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). This is a marketing communication. The mention of stocks is not a recommendation to deal.

 

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 and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. 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. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. 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 Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

 

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.

 

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). This is a marketing communication. The mention of stocks is not a recommendation to deal.

 

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 and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. 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. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. 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 Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

 

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.

 

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

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