Neil Birrell wonders why the UK equity market has lagged much of the rest of the world and if this presents an opportunity.
Most multi-asset and global investors tend to have a domestic bias, typically because they simply know more about their home markets and the universe of investments that they offer; news, information, access and the time-zone are a few obvious reasons for that.
This is normal for private investors, but it is normal for professional investors and fund managers as well, for the same reasons, but also because it is probably their view that is what their clients are comfortable with. It also means the additional risk of currency risk is mitigated.
Domestic bias can be good or bad
So far this year, having a domestic bias has been good news or bad news depending on where you are. If we just stick to markets levels first of all; as I look at my Bloomberg screen whilst writing this (28 August), for the year to date I can see the S&P 500 Index is up just under 8% and the NASDAQ Composite Index is up a mind-boggling 30%. Meanwhile, the Euro Stoxx 50 Index is down 6%, perhaps more reflecting the economic situation, but in the UK the FTSE 100 Index is down over 20%.
Those headline numbers hide many details of just what has taken place though. In the US, as we know, the indices have been driven by a small number of very large companies, much of the broader market has not made much progress. In the UK, smaller companies have outperformed larger companies.
To roll out an old maxim: "It is a market of stocks, not a stock market" - a phrase that active investors live by and it is particularly true today. It describes the moves this year so far and should be a key focus for investors everywhere given the uncertain economic and societal future that we face today.
A UK bias: opportunity or threat?
There are many factors to worry about in the UK at the moment. The Covid-driven recession is deep and will leave scars for years to come, unemployment is likely to go to levels that will lead to problems for society, let alone the economy and the government debt that has resulted will be a burden for generations. There are a few other matters; only this morning there are headlines suggesting that the EU will walk away from the Brexit trade negotiations.
There are these macro reasons for the underperformance of the UK, but the structure of the stock market also helps explain the issue. The reduction in dividend payments is a clear indicator of the structural biases in the UK market.
According to AJ Bell's ‘dividend dashboard' (available on their website) the FTSE 100 Index, which had been expected to produce dividend income of £91 billion in 2020, is now expected to only generate around £62 billion.
The economic impact of Covid-19 could make us re-examine whether we can rely on dividend income from the large companies that generate these dividends. The UK is unusual in its focus on yield as a valuation measure.
If you look elsewhere in the UK, there are many opportunities. I was talking to Gervais Williams, Premier Miton's head of equities, who is full of enthusiasm for the opportunities he is seeing in UK smaller companies in particular.
Jon Hudson and Benji Dawes, who manage the Premier UK Growth Fund, have produced outstanding returns by focusing on high quality companies that should do well through different economic and financial markets conditions. Investing in the right areas of the UK has been a good place to be and will continue to be so; there are a massive number of exciting opportunities, you just need to find them, but not the FTSE 100 Index itself. It is the same story everywhere else.
Although, in the US at the moment, many will tell you it is what you should be avoiding (the big tech stocks) that will be the key to good performance.
In the multi-asset Premier Diversified range of funds that I manage, there is a domestic bias in the portfolios, but I do have Jon and Benji selecting the stocks!
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