Page 12 - DIY Investor Magazine | Issue 40

SCHRODER UK MID CAP FUND PLC:
UK EQUITIES – WHAT’S THE CATALYST?
April 2024 12
DIY Investor Magazine ·
Mid caps particularly well poised for a UK renaissance - Jean Roche, portfolio manager
After several years of disappointing relative performance, it is now widely acknowledged that the UK represents one of the cheapest regional equity markets in the world, with mid cap stocks looking especially attractive.
This ought to bode well for future long-term returns, but the roots of the UK’s under-performance can be traced back to before Brexit, so when can we expect things to change? Here, we examine whether there is anything on the horizon that has the potential to change the UK stock market’s relative fortunes, and find several reasons for positivity, particularly for UK mid caps.
According to data from Morgan Stanley, UK equities currently trade at a near 40% discount to their global peers, which is close to the steepest valuation gap observed since the mid- 1970s. Meanwhile, within the UK stock market, mid cap stocks look remarkably undervalued, with the FTSE 250 now trading at a small but persistent discount to the FTSE 100, as well as to most other small and mid cap markets around the world.
‘THE UK REPRESENTS ONE OF THE CHEAPEST REGIONAL EQUITY MARKETS IN THE WORLD, WITH MID CAP STOCKS LOOKING ESPECIALLY ATTRACTIVE’
Despite the extent of this under-valuation, UK equities remain unloved. As the chart below demonstrates, global fund managers have been consistently underweight UK equities since July 2021, and indeed, they have tended to be significantly underweight the domestic market for most of the last decade.
This has coincided with a period of under-performance from the UK stock market, particularly in the years from 2014 to 2020, as illustrated by the dark blue line.
MOST GLOBAL FUND MANAGERS HAVE BEEN UNDERWEIGHT UK EQUITIES FOR YEARS
Source: BofA Merrill Lynch Global Fund Manager Survey, January 2024. Past performance is not a guide to future performance and may not be repeated.
INFLATION BENEFIT
Fortunately, there are reasons to believe that this may now be in the process of changing, particularly as far as UK small and mid-sized companies are concerned. Global equity markets performed well in the fourth quarter of 2023, with domestically- focused UK mid-caps outperforming.