UK Equities: Timing and Perspective

Much has been written about the shrinking UK stock market, yet the FTSE 100 has been hitting all-time highs. Are we seeing the start of a sustained push from UK equities? Or, is this a flash in the pan?

By Frank Buhagiar

Type ‘UK Stock Market’ into your favourite search engine and, based on the titles of recent articles, London’s equity markets do not appear to be in a good place:

However, ‘FTSE 100 hits new highs’ (or similar) is a headline that has popped up regularly in recent weeks. For, as the graph to May 2024 below shows, ever since the FTSE breached 8000 back in March 2024 (only the second time it has done so), there’s been no stopping the index:

So, why is the London Stock Market still viewed as unappealing despite the record-breaking FTSE 100? Well, it’s a matter of timing and perspective.

Aside from the last few weeks, the FTSE 100 has, except for a scary moment or two, largely traded sideways between 7000 and 8000 for the best part of two decades Compare the FTSE’s performance with that of other major indices around the world over the last five years to 20 May 2024 and the UK index, very much in the laggard camp:

A 15% gain over five years is respectable considering what the world has been through in that time. But compare that 15% return to the S&P 500 and Nikkei 225’s 88%+ returns over the same time frame. Or the 50%+ generated by the French and German indices. The case for London being unloved is there for all to see in numbers.

As for why London has been stuck in the doldrums, take your pick from Brexit to Covid to not having a Magnificent Seven. Subsequently investors have been pulling their funds out of UK equities. According to the Investment Association, UK equity funds experienced £14 billion in outflows in 2023. And 2023 was no outlier – it was the eighth consecutive year of outflows.

For investors wanting out, read persistent selling pressure and depressed share prices. Depressed share prices keep sentiment (and valuations low). More investors sell up and the cycle goes again.

Share prices keep sentiment (and valuations low). More investors sell up and the cycle goes again.

Everything has its price

Until that is, when valuations hit such depths that buyers are tempted back in. One of the first group of buyers to appear in search of picking up a bargain – overseas businesses. Cue flurry of bids for London-listed companies – this year alone has seen offers for Currys, Wincanton, Spirent and Direct Line. Suddenly, there are buyers in town. Sentiment improves and with it the short-term performance of the UK’s premier stock market.

Admittedly, the above is all very simplified but the question is, will the improved performance prove to be sustainable over the longer term or is it just a flash in the pan? Only time will tell. Unsatisfactory answer maybe, but what if there was a way of investing in the UK market with a built-in margin of safety, one that enabled investors to gain exposure at discounted prices?

Enter UK-focused equity investment companies. Whether investing in large caps, small caps, income or growth, seems the lack of interest in UK stocks has contributed to investment company share prices trading at steep discounts to net assets, often at levels close to year highs.

UK All Companies

None of the five companies in the sector are trading at year-high discounts to net assets. Three are trading at double-digit discounts, the two exceptions being Fidelity Special Values (FSV) on a -9.3% discount and Aurora (ARR) on -9.5%.

Not all trusts are trading at major discounts to net assets – Law Debenture (LWDB), which uniquely in the sector runs an operating business alongside a portfolio of UK equities, is trading at just a -0.1% discount (for more on LWDBhave a listen to the management team here).

A further four trusts have share prices trading at sub-5% discounts to net assets – Merchants (MRCH) on -2.0%; CT UK High Income (CHI) on -3.9%; CT UK Capital & Income (CTUK)on -3.7%; and City of London (CTY) -2.5%.

That leaves 12 funds trading at 5%+ discounts to net assets. What’s more a number of these have recently released decent-looking results:

Dunedin Income Growth (DIG) unveiled an NAV total return of +6.7% for the year ended 31 January 2024, beating the FTSE All-Share’s +1.9% and all the other trusts in the AIC UK Equity Income sector.

Temple Bar (TMPL) reported a +12.3% NAV total return for the year ended 31 December 2023 comfortably ahead of the FTSE All Share’s +7.9%.

JPMorgan Claverhouse (JCH) announced a +7.3% NAV return for the year ended 31 December 2023, not far off the All Share’s +7.9%

Murray Income (MUT) posted a +4.5% NAV per share total return (with debt at fair value) and +6.2% share price total return for the six-month period ended 31 December 2023 compared to the FTSE All Share’s +5.2%

Edinburgh’s (EDIN)+13.4% NAV per share (with debt at fair value) total return for the latest full-year easily beat the FTSE All-Share Index’s +8.4% return. The share price total return came in at 8.9%.

Finsbury Growth & Income (FGT)reported a +5.9% NAV per share total return and share price total return of +2.7% for the six months to 31 March 2024, a little behind the FTSE All-Share Index +6.9%

All six trusts making progress to various degrees. And yet, all six trusts trading at 5%+ discounts.

Fear of Missing Out

So, for those investors fearing they’ve missed the boat and/or those concerned the UK market will have its moment in the sun and then revert back to type – that is unloved – most UK-focused equity investment companies provide a route to market with that all-important margin of safety. What’s more, with a General Election called for 4 July 2024, those discounts could come in handy were there to be any election-induced market jitters.

‘Discounted UK equity investment trusts offer margin of safety’ – now that’s a headline worth noting.