Matthew Tillett, Emma Mogford and Benji Dawes
Premier Miton UK equity specialists
For information purposes only. The views and opinions expressed here are those of the authors 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.
Article snapshot
- The likelihood of a crisis in UK banks is relatively small. Since the Global Financial Crisis, UK banks have strengthened and have much more liquid capital to hand and carry far less risk on their balance sheets.
- Markets are also likely to be volatile and offer lower returns going forward, meaning dividends are becoming an increasingly important source of total shareholder return.
- Focus continues to be on the path of taming inflation and the potential implications on economic growth. The question will be how long interest rates will increase and to what level.
UK equities – Value focused: Matthew Tillett
Premier Miton UK Value Opportunities Fund Manager
“In 2022 I noted that one of my key concerns for 2023 was the risks lurking within financial markets themselves.
The collapse of Silicon Valley Bank (SVB) and the related contagion is the latest example. The bank was running a large unhedged exposure to interest rates, which led to a run once depositors realized that the bank could become insolvent. Unsurprisingly this development has led to an increased level of risk aversion elsewhere, with financials stocks taking the brunt of the pain as investors opt to shoot first and ask the tough questions later.
The key question from here is whether this shock is temporary in nature and largely contained to the financial markets, or whether it spreads to other parts of the financial system and, ultimately, to the real economy.
A full-blown banking crisis appears unlikely for two reasons. Firstly, on the asset side, most banks today are very well capitalised by historical standards, meaning they can absorb significant losses before becoming insolvent. The unusual exposures that tripped up SVB are not present amongst the UK banks, which are mostly run conservatively. Secondly, on the liability side, whilst deposit rates are almost certain to rise, this is primarily an earnings rather than a capital issue for UK banks, where the vast majority of retail deposits are covered by the government guaranteed compensation scheme.
That said, any sort of stress in the banking system can only be negative for the real economy because banks are critical to the provision of credit to consumers and businesses. To the extent that credit availability becomes tighter, there will inevitably be an impact on broader economic activity.
The implications for equity investors are mixed. A weaker short term economic outlook means greater risk to earnings. On the other hand, high quality businesses with strong balance sheets may be able to capitalise as weaker competitors fall by the wayside. It also increases the likelihood that central banks shift towards a more supportive monetary policy stance, potentially leading to a change of market leadership towards more interest rate sensitive stocks.”
UK equities – Income focused: Emma Mogford
Premier Miton Monthly Income Fund Manager
“We continue to view the outlook cautiously. After a decade of ‘ultra-low’ monetary policy following the global financial crisis it will take time for markets, companies and consumers to adjust to a new normal. In our opinion the next decade includes interest rates and inflation closer to what we saw in the decades prior to 2008.
This adjustment will prove difficult for some companies to navigate, especially those with high levels of debt. We feel particularly confident in our approach to focus on quality companies against this backdrop. Markets are also likely to be volatile and offer lower returns going forward in our view, meaning dividends are becoming an increasingly important source of total shareholder return.
We also expect fiscal policy to play a more dominant role. This could mean an increase in spending on defence, energy security, infrastructure and housing. The UK contains a wealth of good quality, cash generative companies with attractive starting valuations and we expect, in time, more investors will return to the market.”
UK equities – Growth focused: Benji Dawes
Premier Miton UK Growth Fund Manager
“Focus continues to be on the path of taming inflation and the potential implications on economic growth. The question will be how long interest rates will increase and to what level. Therefore, key economic data releases will play an important role in shaping expectations for the direction of monetary policy by the major central banks. The collapse of the banking stocks will also continue to have implications that will spread further and wider than we can currently predict, and we are likely to see a continuation in volatility in global financial markets.
We refrain from making such predictions as we follow a disciplined process to maintain a balanced approach in selecting quality growth companies at the right valuation. Allocations to the UK remain markedly lower and the low valuation in comparison to other markets mean fundamental as well as technical factors continue to support further strong performance.”
