I’m not the world’s best singer – close friends and family will tell you that. But looking at the state of the UK equity market right now, the lyrics written by the legendary former singer/songwriter of Queen in the 1976 hit, Somebody to Love, seem wholly apposite:
Everyday (everyday) I try and I try
But everybody wants to put me down
To say that the performance of UK equities has been disappointing year-to-date is putting it mildly – unless of course you’d managed to buy at March’s low when the FTSE 100 index fell to 6,888 and trade it all the way up to almost 8,000. As I write, the index is down year-to-date in capital return terms by 5%, with several villainous forces afoot. The daily political noise over Brexit is one of these, the worrying thought of a Labour opposition led by a hard-line socialist Jeremy Corbyn another, while the general economic newsflow is rather uninspiring.
Arguably the main driver of the UK equity market – profits growth – is somewhat mixed, so as ever it pays to be selective. Topping the results leader board, and propelled by an oil price in excess of US$80 a barrel, while yielding close to 6%, have been oil majors, BP and Shell[1]. Miners such as BHP Billiton and Rio have benefited from the tailwind of a stronger US dollar and a so far negligible impact from the trade tariffs, while dependable behemoths, Unilever and Whitbread, continue to deliver solid, if unspectacular, revenue growth. By contrast housebuilders in general, as well as retailers, DFS Furniture and Card Factory, are having a torrid time – the former hit by worries over the costs of housing, the latter impacted by the increasing structural threat of online competition.
…but corporate raiders love UK equities
Yet, overall, UK assets are undeniably cheap – you’ve only got to witness the frenetic level of M&A activity taking place all year. Takeda Pharmaceutical of Japan swallowed Shire, the protracted battle for Sky finally culminated in Comcast delivering its knock-out blow in a bid to scoop up the coveted broadcasting assets. Property owner, Intu, is, once again, the subject of renewed takeover interest, having seen off a bid from rivals Hammerson earlier in the year, while Chinese buyers are once again coming in for London property assets.
… while US equities have become a crowded trade
Overall it would appear equities are looking a tad expensive. President Trump’s fiscal largesse aside, it seems odd when short-term US Treasury notes are yielding a risk free 3%, while the riskier S&P 500 stock market index yields marginally under 2%[2]. That yield gap looks eminently more sensible in the UK as investors enjoy a 4% dividend yield on UK equities, while short-term Gilts offer a yield of only 0.5%.[3]
If at this late stage of the economic cycle dollar strength, US inflation, or rising US Treasuries combine to act as a brake on the seemingly unstoppable rise of US shares, spare a thought for those good old-fashioned unloved, asset-backed UK equities back home. At some point they must resort to mean reversion as starting valuations begin to look ludicrously cheap.
[1] Bloomberg September 30,2019
[2] Bloomberg September 30, 2019
[3] Bloomberg September 30, 2019