David Jane
Premier Miton Macro Thematic Multi Asset Team
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.
Through the investment lens
The recent positive inflation data from the UK has led to something of a resurgence of interest in the UK market, particularly the domestically oriented mid-cap arena. This week we look at this area through the lens of our investment process.
The mid-cap area of the UK stock market (FTSE 250 Index) has been underperforming the rest of the world since 2016. In fact, it is currently trading at levels first reached in 2015. Arguably, this is partly due to European investors divesting because of the UK’s departure from the EU. It had previously outperformed world indices from 2000 onwards. Regulatory changes at that time meant many continental investors moved to EU wide investment mandates, having previously preferred domestic company shares.
Of course, this is not the whole story, mid-sized and smaller companies have been underperforming worldwide for some time. More accurately perhaps, very large companies, notably the FAANGs, have been leading markets higher. However, the UK does seem to be something of an outlier.
Trust in the process
Our process for selecting ideas that go into the portfolio looks at three factors, data, narrative and price action.
The data part looks at the fundamentals, the hard facts and evidence.
UK managers have for some time been arguing that their market is inexpensive, and there is much data to support this view. Like for like companies are cheaper in the UK than elsewhere, the US especially. This has always been the case however, for numerous reasons. They are arguably cheaper than they should be and cheaper than their historical norms.
The UK economy has not performed especially better or worse than other major economies and nor has its corporate sector. Inflation is currently higher in the UK and proving more stubborn. Despite this we don’t disagree that UK domestic stocks are a potential opportunity.
Writing a new narrative
In terms of narrative, this has switched from the UK being seen as a more stable, liquid and better-quality market and economy, to being something of an outlier in terms of lower quality. Both extremes were clearly wrong. The UK remains a very attractive economy from the point of view of doing business, as evidenced by the levels of inward investment and migration. Its stock market is far less liquid than before, reflecting a general refocusing of liquidity into the US and Europe, which is an issue. In general, the narrative internationally regarding the UK does seem excessively negative.
The final part of our process is price momentum. A market can be cheap, stay cheap and even continue to fall for an extended period. It is not sufficient, or even necessary to be right. Better to enter a position when it is showing signs of life, than wait for an extended period for it to begin to move. We wait for others to start to disagree with a hypothesis and are happy to jump in a little after the bottom, so long as there is sufficient long-term upside.
The UK’s time to shine?
In these terms, the recent recovery in UK domestic stocks has made very little difference to the long-term pattern of underperformance, at least in terms of the index. There is, however, some evidence of certain parts of the UK that are showing healthy signs of life. We would not count them as especially attractive compared to, say Japanese or US mid-caps, but they are beginning to come onto our radar all the same. Certainly, good active UK managers have a better chance to shine now than the recent past.
