Thank goodness it’s Friday! It’s been an… interesting week. Sackings, surrenders, family bust-ups.
And then what about the carry on in the House of Commons?
Anyway, let me gild your weekend in my usual indomitable style; welcome to this week’s News, Views and Truths.
Naturally, my newsfeed has been dominated by the return of Parliament and the next chapter in that thing we call ‘Brexit’. And again, the meetings that I have enjoyed with clients have centred upon the topic which is, in itself, wholly understandable.
Be fearful when others are greedy and greedy when others are fearful.
Warren Buffet said that. Warren Buffet said a whole load of stuff over the years, most of it spot on, but this quote, in particular, is a tenet that I personally hold dear to.
And if you were looking at the UK right now, bearing in mind all of the media noise that is bombarding each and every one of our senses, you may possibly come to the conclusion that, of all the global economies of the world, the fortunes of the UK are the worst.
So much so that we need additional body-bags to carry out the increased number of people who will die. Presumably of boredom.
But you don’t want to hear about the economy. You want to hear about investment markets. What’s the difference? Absolutely everything. Why? Let me tell you…
- A strong economy stokes fears that inflation is picking up
- Fear about inflation drives worries that Central Banks could raise interest rates
- Increased interest rates result in corporate borrowing becoming more expensive
- Anxiety spreads across the market, resulting in a sell-off
Now, to say there is no link between the two is simply wrong. But to say that it is intrinsic is folly also. Yet many struggle with that concept, stoked by current fears. So… be greedy when others are fearful.
The negativity of international investors towards UK equities is entrenched – global fund managers have been “underweight” in the UK for three years, according to the Bank of America Merrill Lynch’s Global Fund Manager Survey. Investors are said to be underweight in an asset class when they are allocating less capital to it than would normally be the case.
Indeed, valuations reflect the degree to which investors have shunned UK equities. The chart below tracks the market’s valuation discount versus global equities based on the average of three metrics. The metrics used are the price-to-book value (PBV) ratio and price-to-earnings (PE) and price-to-dividends (PD) ratios.
Based on this analysis, UK equities are trading at a 30% valuation discount to global peers, close to their 30-year lows. While it is likely to persist until there is some form of clarity over the terms of any Brexit deal, the valuation gap provides an attractive entry point for investors with long time horizons.
The valuation of domestically-focused equities is particularly attractive; the uncertainty created by Brexit has driven a slowdown in the UK economy since the EU referendum (albeit, by less than feared), while the global economy has held up well. Associated UK political uncertainty is further weighing on valuations and is being exacerbated by current political shenanigans.
Finally, as a result of reduced allocations and low valuations, the yield on offer from UK equities is at an all-time high. Over the past 30 years, the dividend yield of the UK equity market, relative to the rest of the world has only been higher during the 1991 recession and at the peak of the “dot com” bubble.
In absolute terms, the UK equity market is currently yielding c. 4.5% which compares very favourably to the average dividend yield over the past 30 years of 3.5%. For yields to revert back to their long-term average, either the market has to rise significantly or bad news needs to arrive soon and companies cut payments. They would need to cut them by a good margin, more than they did following the Global Financial Crisis and the ensuing global recession.
So, like any market, be it stocks or socks, if the goods on offer are high quality, yet bargain-basement price, that’s got to be a good investment if your investment horizon is long enough. And despite the doom and gloom pervading the airways, UK stocks are some of the most attractive in the world.
So, stay positive. I am.
And in our usual style, our playlist. Brought to you by the topic of precious metals. Have a great weekend and I shall see you all next week!