Unloved UK Equities

There is a general consensus that the UK equity market is unloved. So unloved it didn’t receive a Valentine’s Day card this year. Some have even considered the UK to be uninvestable. Of course Brexit uncertainty is the main concern for investors but the US/China trade dispute and a slowing global economy are additional factors. But is it all doom and gloom? Russ Mould, investment director at AJ Bell thinks not. In a recent article he noted the FTSE 100 index is up about 6% in 2019 – albeit this is a recovery from the sell-off at the end of 2018. Moreover the UK market is relatively cheap, with many stocks trading at very low valuations and the FTSE 100 has an attractive 4.7% p.a. dividend yield. What however piqued Mould’s interest were analysts’ forecasts of record earnings in 2019, estimated to be £223 billion, an increase of 13% on 2018.

Another notable point here is that at the previous peak in 2011 almost 50% of the earnings came from the mining and oil sectors. This time around the earnings base is more widely spread with banks and consumer staples such as Unilever and Diageo expected to make big contributions. Mould however does highlight a number of threats to bank earnings and of course forecasts are just that. They will depend on a number of factors including the strength of the pound. You may have noticed that when Sterling falls the FTSE 100 index tends to rise. This is because 70% of FTSE 100 company earnings are derived from overseas. If Sterling falls against the US dollar or the Euro the value of those overseas earnings translates into more pounds. Of course the converse is true.

Mould concludes the gloom is somewhat overdone and that meeting or beating earnings expectations could convince sceptical investors back into the UK equity market. I agree although I think a resolution of the UK’s future with the EU will be required first. That said contrarian investors, seeing the positive fundamentals may opt to invest early for the very decent yield of 4.7% p.a. and long term capital growth potential. Whilst I favour actively managed funds there is a case for buying exposure through a low cost index tracker fund to complement actively managed UK equity funds held in a portfolio. A word of warning though. The FTSE 100 index has been a rotten investment in the last nineteen years. At the end of 1999 it peaked at 6,930. Today at the time of writing it is trading at 7,388. Ignoring dividends the capital value of the index has risen by a measly 6.6% in 19.25 years, but as you know past performance is not necessarily a guide to future returns. That works both ways.

The contents of this blog are my own thoughts and assessments based on Russ Mould’s article. Nothing in this article should be construed as personal investment advice, for example to invest in UK equities or a FTSE 100 index tracker. These may not be suitable for you. You should seek individual advice based on your own financial circumstances before making investment decisions.