RE: British shares 50% discount21 Feb 2021 16:28
Nick Train, manager of the £6.5bn Lindsell Train UK Equity fund, agreed with Mr Colwell.
Writing to investors in December, he said political uncertainty caused by Brexit had discouraged global investors from buying London-listed shares in favour of other markets that were deemed more stable.
“We have watched wider and wider divergences develop between the share price performance and the valuations of similar British and non-British companies,” he said.
He gave the example of Rémy Cointreau, the spirits group, whose shares rose 47pc in 2020, compared with a 10pc fall for Diageo’s.
“There are many other examples and for us, therefore, it is no accident that the British stock market has rallied since the Brexit deal was announced. A big uncertainty has been removed and investors can now shop for bargains,” he said.
Mr Colwell added that much of the pessimism around British companies could be linked back to investors chasing “growth and vision” from technology firms, where Britain lags rivals, instead of buying more established firms such as banks and mining companies, which feature heavily on the UK stock market.
This trend of chasing fast-growing shares over “cyclical” British companies, whose fates are tied to the health of the economy, could reverse now that there was a Covid vaccine, he argued.
“Too many people think giant technology companies are the only investment option, but this could change quickly. Consider how rapidly British shares rose after the first Covid-19 vaccine was announced in November. Trends often go on for longer than predicted. But this creates the opportunity we see today, as it amplifies the impact when the switch in momentum finally occurs,” he said.
Investors are underestimating how innovative British firms are, and once they cotton on to this, shares could rise sharply, according to Mr Colwell. “As the discount starts to narrow, the window for buying shares at bargain prices is closing. While sentiment about the British economy has been hurt by both Covid-19 and Brexit, the stock market does not need a great recovery to perform better,” he said.
But not all fund managers think British shares are unjustifiably cheap.
Mikhail Zverev, of Aviva Investors, said investors needed to look at companies on a case-by-case basis before making a decision, as often their price was justified.
“Take tobacco. While Imperial Brands is much cheaper than American rival Philip Morris, this is because it is playing catch up in developing ‘heat-not-burn’ cigarettes, which are less damaging to smokers,” he said.
Mr Zverev argued that investment decisions required deeper analysis than a simple comparison of valuations in Britain and overseas.
“There are lots of moving parts to consider. Even now, there could be issues with implementing the Brexit deal and we are not out of the woods yet with regards to the Covid-19 lockdown. It could take a number of years for some of the discounts on British shares to be reduced,” he said.
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