The UK FTSE 100 Index has outperformed other global markets in the year to date and it’s been driven by outperformance in energy, mining and banks; sectors with serious structural challenges to future growth. Surely this offers scant reason for global investors to shift allocations towards the UK?
While these sectors are much derided by many investors, and not least those looking for beneficiaries of new technology, these are sectors which form the bedrock of a modern economy, with minerals required for semiconductors and batteries, and banks equally playing a key role in supporting the financing of the transition to a greener, more sustainable future.
The relative outperformance of the UK market this year is not simply about the uptick in earnings growth expected for more cyclical sectors, however. It’s valuations, too. The UK stock market is undervalued versus global peers across almost every sector. A rising discount rate environment focuses investors’ minds on valuation, and hence the UK could appear more attractive. The combination of low valuations and rising profit streams is a force not to be ignored.
So the UK offers relative attractions from a valuation standpoint, but what about growth beyond the next few years. The UK has a paucity of companies with leading positions in areas where prospects for growth are rosiest. Doesn’t it?
Looking at the FTSE 100 Index alone, it’s understandable that one might draw this conclusion. Beyond the obvious global leaders in consumer staples, such as Diageo, and two of the world’s leading pharmaceutical companies (evidenced by their success in developing some of the world’s vital covid vaccines), there are only a handful of global success stories. Ocado is a world leading warehouse robotics company, LSE a world leading financial data firm, and JD Sports the largest global retail partner for “athleisure” brand Nike.
There is a notable omission for world leading technology giants. Granted, the recent London listings of gene therapy player Oxford Nanopore and cyber software business Darktrace, along with several consumer internet businesses, offer signs for optimism that the make-up of the senior index is changing. But can we really make a case for the UK when it comes to exciting growth today?
For the investor willing to invest in companies outside the FTSE 100 Index, there are plenty of attractions. Three areas that seem to offer up companies worthy of investors’ attention are fintech, biotech and the so-called metaverse companies.
The UK is home to consumer fintech leader Revolut, which remains privately owned. However, listed peer Alpha FX serves the arguably more attractive corporate banking market, offering a neo-bank solution to international corporates. A founder led business, Alpha FX has ambitious plans that set it apart from many other promising UK businesses. Continuous improvement is ground into the culture, by the same management coach that has worked with the All Blacks rugby team over the past decade.
London is increasingly growing as a biotech hub, drawing in the skills of existing talent pools in Cambridge, Oxford and Stevenage. The London stock market is home to a number of innovative biotech firms less well known than Nanopore, including brain-immune-gut focused Puretech and cell and gene therapy players, Syncona. The pair build biotech companies from the ground up, utilising their talent pool of world leaders to tackle areas of high unmet need. Some of these companies have been spun out and listed on the NASDAQ Index, delivering cash returns for parent company shareholders.
The Metaverse companies offer perhaps the most interesting prospects for UK investors, not least because the UK’s leadership in this area has been evident since the 1980s, draws on expertise in the creative arts and is well supported by investment from the UK government. Mark Zuckerberg may have brought the idea of the Metaverse, conceptualised in the early 1990s by Neal Stephenson into the wider consciousness, but it’s nothing new for the UK’s pioneering video games companies, who are at the vanguard of the internet 3.0, creating much loved, immersive digital experiences for video gamers around the world.
Global giant Microsoft recently signalled its intent to increase its presence in the $180bn industry, with its acquisition of game developer Activision. Consolidation in the sector is accelerating, as the global tech giants battle for content (Intellectual Property), to bring to consumers via their nascent subscription platform offerings.
This trend plays into the hands of the UK’s listed players, who have spent decades curating games that gamers come back to again and again. There is clear evidence that the big boys want access to their game IPs, with the UK’s TinyBuild and Devolver both listing games on Microsoft’s Game Pass exclusives, whilst Games Workshop’s IP is coveted by global giants from Japan’s Nexon to household names like Marvel and Panini.
There is a lot to be encouraged by in the UK stock market, if one is prepared to look just a little harder.