This month’s UK election result was both surprising and unsurprising. With Labour winning 412 seats, it has been dubbed the “loveless landslide”. Keir Starmer has won a massive victory with over three million fewer votes than Jeremy Corbyn got when he lost in 2017. It shows how unloved the previous administration was.
As for markets, the hope is this is a true catalyst for change for unloved UK equities. In a nutshell, our equity market has been one of the least desirable for many years, thanks to the uncertainty of Brexit and an under-representation of growth and technology companies that have driven markets.
Timing is everything – we now have a strong Government, giving it the power to make changes. This comes at a time when inflation has fallen, prompting the potential for rate cuts, which are promising for economic growth.
This could release consumer spending (despite the cost-of-living crisis, we still have a market with positive real incomes, excess savings, consumer confidence at a three-year high and low unemployment).
A number of areas have already been earmarked for growth. Housebuilders are expected to benefit from new Labour initiatives, with some 300,000 new homes touted each year as of writing (compared to 135,000 currently – source: JOHCM, July 2024).
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Improvements to clean energy investment and a new national wealth fund to boost private sector investment are also expected.
But the big issue still sits with getting people to invest in UK PLC. There is some mixed news on this. On the one hand, Starmer has refused to rule out raising capital gains tax (CGT), something that would not be welcome for those investing beyond a tax-efficient Individual Savings Account (ISA).
Clearly there is still the attraction of ISAs themselves (in March 2024, we saw the allowance raised by £5k per year provided investors put these assets into UK stocks). Although welcome, the reality is this has not gone far enough to stem the tide – Microsoft and Apple are now both worth more than the entire FTSE 100.
This brings me back to the need to mandate pension managers to put more money into UK companies.
The exposure of pension funds to UK equities has dwindled dramatically over the past 25 years, with the share of the UK stock market owned by UK pensions and insurance companies shrinking from a healthy 39% to 4% (source: New Financial, Unlocking the capital in capital markets, March 2023).
British pension funds contribute far less to the UK economy than international counterparts do to their own domestic markets. Even mandating 10% would make a huge difference and revitalise UK PLC.
Valuations and momentum
You’ll often hear about valuation opportunities within UK equities. The UK market is cheap on a price to earnings basis relative to the rest of the world. The price to earnings ratio represents how much investors are willing to pay relative to current earnings.
At the start of 2024, UK equities were at their cheapest level – relative to their peers since the global financial crisis (GFC) (source: Franklin Templeton, UK equities).
They are also cheap versus their own history; again, we’re talking the levels seen in the GFC and the early 1990s. This is an economy that leads in delivering income to shareholders as well as smaller company innovation. The largest 100 companies (FTSE 100) also derive three-quarters of their earnings from overseas.
Sue Noffke, Schroder Income Growth’s manager, says: “With regards to UK equities, there’s so much that is oven-ready in terms of capital market reform [that] could benefit them, such as making it easier to float and undertake M&A. There’s real momentum behind these initiatives. In the immediate term, Labour inherit an economy with some positive momentum, inflation has eased such that interest rate cuts are on the cards for the second half of 2024.”
There have been reasons why UK equities have been unloved in recent years, but not to the levels we are currently witnessing. They look incredibly attractive regardless of change, but the catalyst of a new Government could give the impetus to produce significant returns for investors.
Those looking for options might want to start with a couple of solid income funds, like Rathbone Income or the City of London Investment Trust. The latter invests in large UK companies and has increased its dividend payments every year for the past 53 years. Those looking to invest across the spectrum of UK companies might consider ISFL Marlborough Multi Cap Income.
I’d finish by highlighting UK smaller companies – these funds have often been in the eye of the storm, but demonstrate great long-term resiliency through their returns. Funds with excellent, long-term track records include Liontrust UK Smaller Companies and Unicorn UK Smaller Companies.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre
