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Value in the new normal: holding the trust in UK multinationals


One month into 2022, and the FTSE 100 Index is up. The S&P 500, by contrast, is down a tenth.

To describe this divergence as a break in trend for global equities would be downplaying it. Between the nadir of the pandemic in March 2020 and the end of 2021, the US blue-chip index more than doubled, while its UK counterpart added just over 40 per cent. Since the start of the century, the S&P has returned more than 7 per cent a year versus 4 per cent for the footsie, on a total return basis.

The UK’s long record of relative underperformance has been blamed on several factors, including the proportion of highly cyclical companies at the top of the London Stock Exchange (LSE), and the differing effects of persistently low interest rates. When bond yields are negligible, so the argument goes, the relative attraction of cheap (or ‘value’) stocks pales against ‘growth’ businesses that can raise money cheaply and expand more aggressively.

For investors, the US market has become synonymous with the latter camp and many of the high-growth technology companies remaking our world and offering the greatest promise of outsize future profitability. By contrast, the FTSE 100 is seen as a ‘value’ market with a heavier weighting of companies and sectors defined by slower long-term earnings growth.

Some investors have even painted London as an equity market backwater in which powerful pension funds force boards to prioritise dividends and income over capital investment. The money manager Paul Marshall recently wrote that the LSE risks becoming “a sort of Jurassic Park where fund managers dedicate themselves to clipping coupons rather than encouraging growth and innovation”.

Is this fair? Are the leaders of large UK-listed failing to innovate and stay competitive, preferring to erode long-term equity growth? And could a ‘new normal’ of higher inflation and rising interest rates benefit UK-listed multinationals and their shareholders?

Simon Gergel, a portfolio manager at the UK-focused Merchants Trust and chief investment officer for UK equities at Allianz Global Investors, thinks the first place to start with is fundamental analysis.

“Value and growth are not opposites,” said Gergel, speaking on 26 January at an Investors’ Chronicle webinar on UK equities. “We look at the growth of every company – every company has an element of growth – and really, investing is about trying to balance those two things, and buying a company at the right price for the growth you’ve got.”

Over the long term, argues Gergel, debates over stock picking styles can become both academic and divorced from the way companies evolve. “You find over stock market cycles that companies you think of as ‘growth’ today might be offering good value in the future and many of the companies that you’d put in the ‘value’ bucket today could actually have quite decent growth in the future.”

John Moore, a senior investment manager at Brewin Dolphin, offered a broadly optimistic take on the outlook for the UK market, suggesting that the “narratives of ‘value’ and growth’ hide a lot of things, and can be shortcuts that often create opportunities”.

“The best example of this I can think of in the year to date, is the war between GSK and Unilever – both multinational businesses, and both businesses that recognise they need to change for the benefit of future growth for shareholders,” said Moore. “What we can see from that episode is they don’t always get it right, but the direction of travel is typically positive for both companies.”

Despite repeated hiccups and setbacks, the backdrop for UK plc is also gradually improving. Kirsty Stone, senior adviser at The Private Office, pointed out that the IMF expects the UK economy to be 12 per cent larger than its pre-pandemic level by the end of 2022.

In theory, improved stability should also help those investors looking for the more stable returns, associated with large UK corporates and higher income-paying value stocks. “It’s important to remember that a huge amount of income for UK companies is derived overseas,” added Stone. “So, anything that we see happening in China is going to impact UK companies, purely from a supply and demand perspective.”

Some members of the panel also pushed back on the idea that dividends show a lack of executive imagination or investment opportunities. “By and large they tend to be quite sensible payout ratios,” said Tineke Frikkee, head of UK equity research at Waverton Investment Management. “This isn’t a bad thing per se, though there are probably a few companies that we could debate whether they should cut it.”

The panel was also keen to highlight the growth opportunities within UK large caps, from the energy transition, healthcare, industrials and financial services. Consumer staples, which make up the largest share of the FTSE 100 by constituent, were also cited for their ability to adapt to higher inflation. The sector, said Gergel, has historically “been able to pass on cost increases through price, as they’ve had strong brands and managed to sustain higher margins. They tend to have a period where they get squeezed, but over time they pass on higher prices.” 

With all of this in mind, what are the prospects for the year ahead? Are investors in UK equities due a rare instance of outperformance versus the US market?

“There’s a bit of déjà vu because a year ago [2021] started very strongly for value…and then growth closed the gap,” noted Frikkee. “Ultimately we are in a period of heightened volatility as we fret about how long inflation lasts; maybe that is slightly less conducive to growth, and slightly more conducive for the UK.” 

To hear more of the panel’s thoughts on UK large caps, value in the FTSE 100, and discussions of a range of sectors and stocks, you can watch back here until 25 February.