Page 6 - DIY Investor Magazine | Issue 38

Aug 2023 6
DIY Investor Magazine ·
EQUITY INCOME: THE UK IS NOW ONCE AGAIN THE MOST ATTRACTIVE MARKET FOR THE INCOME INVESTOR
Charles Luke, Investment Manager, Murray Income Trust PLC
• The UK is a very international market with around half the revenues of UK-listed companies generated in the United States and Asia Pacific, with Europe also holding a major share.
• The UK market trades at an approximate 20% discount to global equities.
• The yield premium for the UK market is now at its highest point for the last 15 years.
It is some years since UK equity income portfolios were
the toast of the town for the core of an investment portfolio. Investors have been seduced by the charms of global income portfolios. After all, why not have the whole world at your fingertips rather than just a single market? The reality is more nuanced.
The UK is an international market. Many companies listed
on the UK market draw their sales from around the world, which means they are not dependent on the UK’s - admittedly sluggish - domestic economy.
The United States and Asia form around half the revenues of UK companies, with Europe another significant chunk. Investors are already getting global income from their UK portfolios.
But why not just buy a global income portfolio and get the broadest possible opportunity set? The answer lies in the valuations of UK companies, which have been pushed lower by weaker confidence in the UK economy and political system. This has left UK share prices cheap relative to their global peers.
The absolute discount to global markets sits at around 35%. However, the UK market has lighter representation in areas such as technology, which tend to trade on higher valuations.
Adjusted for these sector differences, our estimates suggest the UK market is at an approximate 20% discount to global equities.
‘INVESTORS ARE GETTING GLOBAL INCOME AT A KNOCK- DOWN PRICE BY INVESTING THROUGH THE UK MARKET’
We see this in the rating of UK companies relative to their international peers. A variety of companies in the Murray Income portfolio helps to highlight this: BP trades at a price to earnings ratio around 40% below US-listed Exxon; Diageo’s valuation is around two-thirds that of US distiller Brown Forman as is Rentokil compared to US peer Rollins; Smith & Nephew trades at around 16x its annual earnings, compared to 25x
for US-listed competitor Stryker. It is difficult to determine differences in the operations and prospects for these businesses yet there is a chasm in terms of their valuations.
Apart from the global financial crisis, the UK’s market multiple is nearing its lowest point for 30 years. It is cheap in absolute terms, relative to history and also relative to global equities.