Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Diversified fund range has a look at the prospects for UK equities and wonders if it’s the beginning of the end for the rise in share prices of the big tech and comms companies.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
In favour (with us, out of favour with many others); UK equities
I have been around the country recently for a number of meetings with groups of advisers to talk about the economic and financial market outlook and the Diversified funds; how they are positioned, performance, the usual conversations. One stand out point of debate (other than the return available on cash these days) was over UK equities; are they a value trap? When will they start performing? What will be the catalyst? On the weighting we have in the funds; is that just domestic bias or do you really like them? All good questions and worthy of debate!
To answer the last question first, as the answers are simple. We do not have a domestic bias, we will invest where we think the opportunities are best, within the context of the Diversified portfolios and their risk profiles and where we have a proven investment strategy and the necessary skills. We like UK equities, Jon Hudson and Benji Dawes who manage the UK portfolio for the funds have been major contributors to the funds’ performance over a long period of time.
So, what will push UK equities to be back in favour? There has been much debate around encouraging institutional investors back to a market they have been deserting, but in my view the type of measures proposed at the Mansion House speech recently are far too little and will take far too long to have any impact. It’s hard to see how it is possible to mandate independent investors to make investments in specific areas. It is in the interests of the country and the major political parties (in the run up to an election) to have a thriving stock market and investors who will fund new, exciting companies, but there is no quick fix. In my view, the way UK equities will get back in favour will be simply because domestic and international investors see them as good value with good growth prospects in comparison to other assets they have to choose from, which is plenty.
Firstly, at the highest level, UK equites look cheap by international and historic comparison; that is a good starting point. Some of that comes from the structure of the stock market and relevant indices, where there is a higher weighting to more lowly valued sectors such as energy and materials and a lower weighting to higher valued sectors such as technology. But over and above that, there does appear to be a discount applied to companies listed in the UK compared to elsewhere. Again, at a high level, if you look at the healthcare sector, the UK trades at a big discount but it is growing earnings at a comparable rate and the companies are not significantly, if at all, any worse.
What has caused this? The Brexit referendum was certainly a catalyst for this and Brexit itself had an impact. The domestic political background has been unstable and remains uncertain. The economy has not been that robust, inflation is higher and interest rates are rising further than elsewhere. So it is explainable.
Macro-economic factors have been a driving force of asset prices around the world for some time now and that remains the case, for the UK that has not been helpful. But when that reverses it is likely to have a significant positive effect, as witnessed since the better than expected inflation data for June, after which we saw a very sharp jump in the prices of property companies and investment trusts in the alternatives sector and a reaction from small and medium sized companies. Share prices in these areas have been under pressure for some time.
The macro environment will improve, it is likely to get worse first and we may well go into recession, but unless it is a bad one, and the forecasts don’t suggest that, then I think investors might just look though that to better times. No one, not even the Bank of England or recent forecasts from the National Institute of Economic and Social Research suggest we are heading for a booming economy, but once inflation is beaten and interest rates have peaked, there is a chance that company fundamentals (profitability, growth prospects, balance sheet, quality of management, acquisition potential amongst other factors) will be the driver of share prices, not macro data.
When that happens, we believe there are a very large number of very good companies standing on attractive valuations, in various sectors and of different sizes that should be good places to invest. Jon and Benji have many good examples of those within the Diversified funds and the other members of our UK equities investment team tell me they have that in their funds too.
To my mind, it is a case of when rather than if UK equities are a favoured asset class again. But it will be important to be in the right sectors and right companies; stock selection will be key and it will come from investors seeing the financial returns that can be made rather than attempted structural or politically influenced change.
Out of favour (with us, in favour with many others); the big tech and comms companies
I am referring to Apple, Amazon, NVIDIA, Tesla, Alphabet (Google), Meta Platforms (Facebook) and a few others, in other words the relatively small number of very large US technology and communications companies that have driven market indices higher. You will have seen numbers and how they have left the rest behind, so I won’t repeat that here.
In contrast to UK equities the questions have been; how long can they keep going up? What will cause their share prices to fall? Just how expensive can they get? We won’t know that until we look back and see that the tide has turned.
A rational investor would expect those companies to start underperforming at some point. In no way am I suggesting that we are at that point yet, but it is interesting what has been going on recently. It’s hard to see how they can keep growing at the rates they have been; just how many iPhones does one person need? Apple announced on 3 August that it had suffered the third straight quarter of declining sales and predicted similar for the current quarter, which would be the worst run of sales declines in 20 years. Its share price has fallen 9.5% from its peak on 31 July 2023 to the date I am writing this, 12 August.
Since announcing results in May which brought to the world’s attention the potential growth in AI, NVIDIA has been the darling of the stock market. Its share price fell 8.6% in the last five trading sessions (up to 12 August), as semiconductor manufacturers sold off more broadly. Mind you, its share price is still up about 180% year to date, and it is valued at over $1 trillion.
Tesla has fallen 17.5% since the recent high in July, again to 12 August, as it has been cutting prices and demand for electric vehicles is under a bit of pressure. Netflix has fallen 11.7% over a similar time period and Microsoft is down 10.7% following announcing mixed results.
But it’s not all bad news for tech investors; Amazon, Meta and Alphabet’s share price have remained stable.
As mentioned, I am not calling the top now, but we might look back and see that we were somewhere near it at this point in time. Or maybe company fundamentals will start driving their share prices rather than macro considerations, which would probably result in greater dispersion in their share price returns.
I should point out that we do hold NVIDIA and Microsoft in the Diversified Cautious Growth, Balanced Growth, Growth and Dynamic Growth funds, as well as other semiconductor and technology companies. We have been trimming the holding in NVIDIA through the year as the share price has risen and we continue to like the long term prospects for these companies. They may well underperform for a period, but that is when we would expect the UK equity exposure and other parts of a diversified multi asset fund to do the heavy lifting!
This note turned out be a lot longer than the usual ones, but there was quite a lot to say.
