- The UK is currently trading at a c.40% discount to global peers
- 32% of global returns since 2012 can be attributed to the technology sector, which account for just 1% of the UK market
- The UK market pays a 4% dividend yield vs the US’s 2%
Bowmore, like many UK asset managers have a home bias – by that we mean an overweight to UK equities (16% exposure at risk profile 5) when compared to the world equity index, which only holds c.3.6% at present, down from c.10% just over a decade ago. The main reasons behind this overweight are explained below, as we believe UK equities are particularly primed for a positive 2025 given valuations, a hive of corporate activity and a healthy consumer.
Attractive valuations
The UK market is currently trading below its long-term average and is at a c.40% discount to global peers – a figure which usually floats around the 15-25% range. This presents a good opportunity for investors to benefit from mean reversion, as the gap between perception and real value closes, boosting share price and total return.
Being cheap also provides defensiveness, and as we saw earlier this year in the heightened volatility of late July and August, when the US and Japanese equity markets sharply sold off, UK equity held relatively steady and rose in August.
Global forward price to earnings ratios
Source J.P. Morgan Asset Management, 2024
Corporate activity
The UK is a hub of activity on the corporate front. Dividend yield is competitive (4%), share buybacks are at extreme levels vs own history and now almost overtaking the US – who are usually streets ahead – for example BP have spent some $24bn since 2021 buying back their own stock. Mergers and acquisitions activity is also picking up, only to be fuelled further by lower interest rates.
This all suggests that UK equities are unfairly cheap, and an example of this playing out in the market earlier this week was Direct Line rejecting Aviva’s takeover bid stating it undervalued the business, despite Aviva offering them a 58% share price premium and promising cost savings.
Buyback activity
Source: Schroders, 2024
A steady consumer: real income growth and low unemployment
The cost-of-living crisis is technically over with wage growth (4.9%) remaining above inflation (2.3%) for much of this year. That coupled with a steadily growing household savings ratio means consumers are better insulated from future economic shocks, and further rate cuts from the BoE could have a positive impact on domestic consumption, bolstering corporate earnings.
Excess savings rates (%)
Source J.P. Morgan Asset Management, 2024
Bowmore portfolios
Our allocations to UK equities cover each corner of the market cap scale from AIM to large cap, and within our core offering we allocate to four actively managed funds. Each specialises in a different area of the market for example, our largest cap fund – Artemis UK Select – has an overweight position within financials, which have outperformed this year due to strong earnings results and the ‘higher for longer’ interest rates narrative supporting future profitability.
Chelverton’s UK Equity Growth fund balances AIM and small cap opportunities, allocating about 50:50 to each market, and currently is overweight to the technology sector – investing in businesses like GB Group Plc which provide identity verification, location intelligence and fraud prevention software. Both funds have kept a pace with the US market over the past year, returning 32.9% and 17.1% respectively.
