London Calling

UK equities represent a ‘once in a generation’ opportunity for investors according to the managers who joined us to discuss the outlook at our event last week…

Last week we saw more than 300 investors join us for a series of roundtables and presentations from managers running money in the UK.

The purpose of the day was to discuss the potential for a sustained, significant recovery in UK equities which have – since the referendum in 2016 and until the relief rally which began with the vaccine rollout last year – had a somewhat torrid time of it.

We have held the view for some time now that with Brexit behind us and the population vaccinated Britain’s long sojourn in the wilderness could make it an attractive destination for investors in a world where valuations are high in many key markets.

It turns out our readers share that view.

Before the event began we asked readers to describe their outlook for UK equities and found they were overwhelmingly positive about the prospects for a continued ‘Blighty Bounce’. 77% of the 87 respondents to our poll said they’d increased their exposure to UK equities since Q3 2020, and a similar proportion said they think UK equities remain undervalued as we approach the July 19 unlocking deadline. 88% thought small and mid-cap stocks were the way to play that recovery, and with that in mind last week we heard from a range of managers running UK equities across the market cap spectrum, the majority of them running portfolios focused on small or mid cap strategies.

Morning highlights

The day began with a conversation between Kepler Trust Intelligence senior analyst Thomas McMahon and our first three speakers; Janus Henderson’ James Henderson, Majedie’s James de Uphaugh and Schroders’ Rory Bateman.

They painted an encouraging picture for the United Kingdom which, according to the consensus among them, has now put Brexit firmly behind it. While the broad sunlit uplands promised by the Leave campaign have transpired to be somewhat more of a barren steppe than a rich prairie – ‘a thin deal’, ‘making it very difficult for smaller UK firms to trade with the EU’ which is ‘not amicable’ to paraphrase the speakers – the long term uncertainty caused by the painful negotiations of the last few years has, mercifully, been put to bed, and the outlook is positive as a result.

“This is the start of a long journey for the UK,” said Rory Bateman – manager of the Schroder British Opportunities which aims to capitalise on the return of confidence to the UK. “Businesses hate uncertainty and that at least is behind us. UK equities are on a thirty year low versus peers, and we see this as a once in a generation opportunity to get involved in some fantastic businesses.”

Majedie’s James de Uphaugh, manager of Edinburgh Investment Trust and the UK equities sleeve of Majedie Investments, said a crucial element of the rally would be driven by the return of international capital to UK equities.

“2016 was a big issue – at one point the UK was classed something like Italy in political terms. That is hugely rear-view mirror now; there is political certainty and we have seen an increasingly sure-footed COVID campaign of late, after a bad start, and we can see that international investors are starting to come back. The risk premium of the UK market is now falling, and has scope to fall further. Brexit is no longer the suppurating sore that once was.”

James Henderson of Henderson Opportunities agreed, and described the positive impact that last year’s ‘trial by fire’ has had on UK plc. “People had to look at themselves very hard last year and the result has been that costs have been lowered and operating margins have grown. Going forward I think analysts will be seeing surprises on the upside when it comes to margins, and that is a big positive. Politicians mess everything up, business will sort it out.”

Each manager then went on to discuss the outlook with their own portfolios in mind, and you can listen to those presentations and download the slides that went with them by clicking on the slides below.

Afternoon highlights

Our afternoon sessions were focussed on smaller companies and at lunchtime we joined Kepler’s Callum Stokeld, as he chaired a roundtable discussion between smaller companies experts from JPMorgan, BlackRock and micro-cap specialist and activist investor Downing.

BlackRock Throgmorton’s Dan Whitestone said the UK’s outlook was based on far more than a simple ‘reflation trade’ but stressed that active management was the key to unlocking the UK’s potential – allowing investors to take advantage of the huge variety of companies that can be found in this ‘weird and whacky’ small and mid-cap market.

“There are some phenomenal companies out there and some really awful ones, which makes it a very exciting place for active managers.”

Downing Strategic MicroCap’s Judith MacKenzie said this focus on active management was the key to her strategy. “Speaking to companies and getting involved directly is where we are really able to add value, there are lots of quality businesses out there on attractive valuations, the trouble is they can be drowned out amid the noise of a market pumped up on Government stimulus.”

JPMorgan Smaller Companies’ Georgina Brittain, who has managed the trust since 1998, said the opportunity for UK investors in small and mid-caps was, at this point, like nothing she had seen before in her lengthy career.

“We are in sell to buy mode, literally crawling through the portfolio looking for things we can bear to let go so we can raise money to add others.

“It’s not just IPOs, either, although we are seeing lots of fresh blood coming to the market – it is across the board; I only wish that we had more money to buy without having to sell first.”

For those fearful that inflation is a threat, she said wage inflation in particular was likely to be a short term problem for UK companies.

“If you look at what is going on in this country – the unemployment numbers and the number of people on furlough – there is something of a disconnect between that and the wage pressure we are seeing, which suggests it is somewhat transitory. This is a very exciting time.”

You can listen to each manager’s presentations and download the slides that went with them by clicking on the slides below.

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