RE: Definitive Summary Of UK Market - part one14 Apr 2022 19:54
Technology fail
Part of the UK’s underperformance is the underlying skeleton of the market. Technology groups dominate global growth as businesses compete to be the next Google, Apple or Alibaba.
The UK is barely in that race. The technology sector accounts for less than 5 per cent of the UK’s total market capitalisation. In Germany, it is 11 per cent. In the US, it is almost a third. Investors’ fascination with growth has been fuelled by a record period of low interest rates. But, as these start to rise, the value of future cash flows fall as they are discounted to present value.
The UK began to trail other global markets, on a total return basis, at least two years before the Brexit vote due to this value bias in terms of the composition of stocks. And even if you adjust for that bias, the valuation discount shrinks but is still about 10 per cent, calculates Simon French, economist at Panmure Gordon.
UK-listed companies have to therefore work harder and increase earnings faster to achieve the same stock ratings as peers elsewhere. “Failure to embrace a growth-oriented mindset is unnecessarily raising the cost of equity capital [in the UK],” says French.
Using price-to-earnings to growth (PEG) ratios, a metric that combines a stock’s valuation and its expected growth, French found the UK at 1.3 times was substantially below the EU at 1.7 times and the US at 1.9 times. “Eight out of 11 industrial groups [surveyed] across both Europe and the US have higher PEG ratios than their UK equivalents,” says French.
Software group Blue Prism typifies some of these failings. The maker of robotic process automation tools will leave the UK’s junior market, Aim, in a £1.24bn deal with SS&C of the US. That takeover price is well below where its shares were trading as recently as the beginning of 2021.
Blue Prism is not the only UK-listed business that went to foreign owners at a perceived knockdown price. Takeover attempts were at a 14-year high last year and bids from private equity were at a record. Markets are telling investors that UK assets are a bargain but many buyers are simply not listening. If they were, valuations would be higher.
Looking for someone to blame
The findings from the Panmure Gordon analysis lend weight to Marshall’s criticism that UK money managers have become part of the problem. Income funds invest in the lower-risk, steady-return, cash-generative businesses that make up much of the FTSE 100.
Such income funds only make up 5 per cent of the £1tn of UK managed equity assets, according to the Investment Association. But, says Marshall, this income focus is more widespread than just these officially designated funds. He argues that the whole UK fund management industry has a deep-seated income bias that has become ingrained in investment mandates, from pensions to insurance and other funds.
That creates a cycle of negative feedback that is cutting off the lifeline of new growth and keeping the UK market
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