Page 12 - DIY Magazine June 2018

UNLOVED OPPORTUNITIES FOR THE PATIENT UK INVESTOR
Despite the recent share price rally, UK equities are the most unloved they have been for some considerable time, says Richard Buxton, head of UK equities and manager of the Old Mutual UK Alpha Fund.
I have to admit to feeling a little down of late... and with good reason. My particular asset class, the UK All Companies Sector, has seen persistent outflows of money for the last four calendar years, a trend that has continued into the first quarter of 20181.
Against this background, recent news that according
to a well-known global fund manager survey, global investors have never held such an underweight position in UK equities comes as little surprise to this investor. The question is why?
It may be the impression that the UK economy is set to be one of the slowest growing now that Europe is recovering and the United States is benefiting from fiscal stimulus. It may be a concern that the UK will suffer materially post-Brexit, or the probability that at some point Britain votes in a redistributive and anti- business government set to raise corporate tax rates.
Or, more constructively, it may be that domestic investors are at last recognising the degree to which they are under-exposed to US equities, a significant part of the MSCI World index, and addressing this in part through investing more in global equities.
But whatever the reason, it is clear that UK large cap stocks are pretty unloved right now.
It is interesting, though, to note that this view appears to be at odds with the attractions that numerous corporates and activists can see in some UK shares. At the time
of writing, there are two bidders battling to win control
of Sky, whilst Shire has just agreed a combination with Japan’s Takeda Pharmaceutical. Midcap engineer Fenner has agreed to be bought by France’s Michelin.
1 Source: Morningstar, calendar years 2014 to 2017 and Q1 2018.
2 Source: Bloomberg, 12 month rolling forecasts for end December 2018.
IT IS TRUE THAT THE SCALE OF M&A ACTIVITY GLOBALLY IS REACHING LEVELS THAT HAVE THE CONTRARIAN INVESTOR FEELING NERVOUS.
Meanwhile, activist investors have appeared on the share register of no fewer than three stocks I hold: Barclays, Micro Focus and Whitbread. These multi- million pound investments have not been undertaken lightly and point to significant undervaluation of these companies in the eyes of the activists.
Despite the fact that the current bull market may be
nine years old, it has certainly not reached extremes
of valuation, in my view. With the FTSE All-Share index trading below its long-term average, at a little over 13 times forecast price/earnings multiple and a yield in excess of 4%, this would hardly suggest that any buying frenzy on the part of investors is at a peak2.
It is true that the scale of M&A activity globally is reaching levels that have the contrarian investor feeling nervous. Let’s not forget it is when confidence and share prices are high that the siren voices of investment banking advisors become irresistible to many boardrooms and deals are typically done.
So a note of caution from the flurry of deal-making currently underway, but with an eye firmly on valuations the ground seems reasonably sound underfoot.
Investors often shun UK large cap stocks as they perceive that mature, low growth companies or industries such as banking or commodities can only offer low returns. But whilst there may be an element of truth to this, fortunately, even in very large companies, the stockmarket can let share prices fall far away from the intrinsic value, or actual worth, of a business. You need to be patient and play a long game, but this does allow the investor to make considerable gains even in very large companies.
DIY Investor Magazine | Jun 2018 12