Why this is NOT the time to throw in the towel on UK equities.

20th Aug '23 by Paul Hill

8 comments 907 reads

The BoE's higher for longer interest rate mantra (see below charts from JP Morgan), alongside the UK's sticky core/wage inflation - is translating into sub-trend #GDP growth.

Equally though, UK #equity valuations appear far too low (see below) both in relative and absolute terms - regardless of the elevated bond yields (re TARA).

Meaning despite the recent PAINFUL losses on smallcaps, I remain S/T bearish on the economy, but L/T bullish on #FTSE stocks & plan to ride out the present market storm.

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About the Author

Paul Hill

Premium Member

Stocks owned : EQLS, AGFX, Pfizer, Bristol Myers, Roche, WATR, VCT, MBH, ASTO, IOM, TR25, ESYS, ELCO, IHC, Paypal & AOM Elsewhere, I'm also paid by Vox Markets (as a contractor) to interview interview fund managers, capital market experts & companies (re EQLS, VRCI, BELL, FIN, AVG, AVCT, LLAI, VLG, FADL, SUP, ELCO, LORD , MPAC & ONC). I believe all these stocks are clients of Vox.Lastly my 24 year HIT RATE is only 62%. Meaning 38% of the time I lose money (ie often wrong) - albeit my winners are (on average) 1.5x larger than my losers. Please Do Your Own Research. more »

8 comments

Silver Moon

20th Aug '23

I don't think there are enough people in the UK making money for the UK, too much dead wood now, but I will hang on and hope for the best. Perhaps things will change when we get better governance in all areas.

BnB

20th Aug '23

UK sub-trend GDP growth has been evident for the last 15 years of low interest rates and low inflation since the GFC. I don’t think you can blame high inflation and interest rates today. UK shares are cheap for a several reasons, most of them well-founded, from disastrous productivity to adverse demographics to elevated political risk to Brexit self-harm. That’s not to say I don’t see good companies on attractive valuations. But my definition of good includes a high proportion of international earnings in attractive jurisdictions.

MattH

20th Aug '23

This is pretty much exactly how I feel too. Ideally I want a company with either a very unique product and/or some strong international operations. I feel the UK has some issues that are quite structural and will not be easy to address so I'm unfortunately struggling to be too optimistic if we're just looking at UK growth.

timarr

20th Aug '23

I don’t think you can blame high inflation and interest rates today. UK shares are cheap for a several reasons, most of them well-founded, from disastrous productivity to adverse demographics to elevated political risk to Brexit self-harm.

While undoubtedly true that's all in the price, surely? Human beings are hard wired to project current states indefinitely into the future, but it wouldn't take a huge amount to go right from here to see a substantial recovery in the UK markets.

That's not to say that better growth prospects don't exist elsewhere - they clearly do. But growth comes at a price and makes assumptions about the future that aren't guaranteed. I think it's interesting that recent profit warnings by UK stocks haven't been followed by share price wipeouts - there's a lot of pessimism already baked in.

On a risk reward basis I favour the UK right now. Longer term I'd need to see a significant change in the attitudes to productivity, growth and innovation in order to maintain that bias.

timarr

Benson212

20th Aug '23

I know we have an aging population, but this shouldn't impact your ability to succeed in the stock market. The stock market is not a direct reflection of the economy. If you've been following sound investing principles (e.g. a diversified portfolio of VM/QM stocks) you would have done extremely well over the last decade. This is in spite of macro events such as Covid-19 and Brexit.

DavidMcCabe

20th Aug '23

It is also important to remember that just because many small cap UK shares are exposed to the UK economy, not all are.

My portfolio is exclusively Aim and FTSE small caps, but I would say that more than half have the majority or all of their operations and revenue outside of the UK. Companies such as Vesuvius, Zotefoams, ME Group International, Volex and Renold, for example, which have been doing pretty well over the last six months.

I also hold Forterra, S & U, SCS and Watkins Jones (oops), which are pureplay UK, and are a mixed bag.

Being focussed on cyclical and sensitives companies in the small cap UK market, and being early to the party has been pretty painful overall, but I am with Paul on being hopeful for the medium term.

Paul Hill

20th Aug '23

It's always darkest before the dawn.

BnB

20th Aug '23

On a risk reward basis I favour the UK right now. Longer term I'd need to see a significant change in the attitudes to productivity, growth and innovation in order to maintain that bias.

I agree on risk/reward and have been increasing my exposures to good quality UK firms lately. But I also agree with the latter part of your assertion, which was, after all, my original point. I’m happy to keep UK company exposure at only 20%, and most of those are bigger international earners than local.

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Why this is NOT the time to throw in the towel on UK equities.

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Paul Hill

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