With companies buying up their own shares, foreign investors returning to the UK and attractive valuations on offer, should investors be looking closer to home for opportunities in 2025?
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The trouble is we’ve heard the case for UK equities turning a corner before. The reality is that UK equities have been facing significant challenges since the Brexit vote of 2016 – not only has sentiment been challenged, it has been compounded by investors being seemingly more enthused by high-growth US technology stocks.
Performance over the past eight years since the Brexit vote has been muted when compared with the likes of Europe and the US*. However, UK equities have performed solidly over the past four years since the pandemic. In fact, the UK market has very much held its own against global markets since 2020. Interestingly, the performance of the UK has been powered by corporate earnings rather than the narrowing of the valuation gap versus other markets**.
This highlights just how poor sentiment is towards UK equities. The UK market remains undervalued not just compared with its global peers but also relative to its own historical levels. Not only have foreign investors steered clear, but investors have been selling UK funds in their droves.
Between 2016 and 2023 we’ve seen almost £50bn of outflows from UK equity funds, £33.6bn of which came between 2020 and 2023, when the market had improved slightly. The figures are no better for 2024, with almost £10bn of outflows in the first nine months of the year***.
This has had a huge impact. The MSCI World is a widely followed global stock market index that tracks the performance of around 1,500 large and mid-cap companies across 23 developed countries. The UK accounted for 5.3% of this index a decade ago**** – it has now fallen to 3.6%^.
Poor sentiment is having an impact for no real reason. UK companies are effectively trading on a 15-50% discount to their US peers, depending on the sector^^.
Plenty of reasons to suggest things are changing
However, there are a host of reasons to suggest we are starting to see green shoots for UK PLC. The vanguard for this movement has been both mergers & acquisitions (M&A) and share buybacks by companies.
While valuations, strong cash returns and rising earnings may not have attracted fund buyers, corporates/private equity entities have been circling UK companies – we have seen over $56bn of deals in the UK market over the year to date^^. This was even despite a lull heading into the UK General Election – with more activity expected heading into 2025. Buybacks (companies buying back their own shares because they believe they are cheap) have risen 144% over the past year for FTSE 100 companies; the numbers are even larger for the FTSE 250 and FTSE Small-Cap, with rises of 323% and 408% respectively^^^.
Artemis UK Select fund manager Ed Legget says another way companies are actively working to close the UK valuation gap is by relisting their shares, often in the US, where they can tap into a bigger pool of liquidity and instantly be awarded significantly higher valuation multiples. He says the combination of M&A, buybacks and re-listings has taken away about 6% of the UK’s market-cap (shares taken off the market)^^.
Why a UK recovery can be sustained
Ed says fund flows from overseas will be the big kicker for UK equities to start recovering, believing he says the political stability brought by Labour’s recent victory in the General Election has already started to bring an upswing in the market from global institutional investors. This is supported by the latest Bank of America’s fund manager survey showing global asset allocators looking to move to an ‘overweight’ stance in UK equities for the first time in three years^^.
Poor sentiment towards UK equities has also overridden some of the long-term benefits provided by the home market – not least that it offers diversification from technology (a sector which has had a bit of a pullback following strong outperformance). By contrast, the UK has strong exposure to banks, utilities and energy companies. Remember, the UK is the leader in dividend providers globally – meaning investors are being paid well to wait. The UK also offers exposure to a number of companies with global revenue streams – the companies in the FTSE 100 derive an incredible 74% of their revenues from overseas^^^^.
