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After a 12-month delay, Euro 2020 will finally kick off this evening when Italy and Turkey meet in Rome. With Gareth Southgate’s men starting the tournament as favourites, England fans will be hoping for the best, while Wales supporters will be hoping they can repeat or even better their 2016 performance.
With three of the home nations represented and ten matches hosted on home soil, the United Kingdom has some exciting weeks ahead. And, while stadiums won’t be full, some fans are finally returning.
As with so many other sports, 2020 saw football fans replaced by cardboard cut-outs and canned noise. And, according to Richard Colwell, manager of Threadneedle UK Equity Income fund, investing in the UK in 2020 felt a little like the football experience we endured during the past year – without the crowds it was indeed a lonely game.
“Animal spirits, dampened already by protracted Brexit negotiations and the resulting uncertainty, were crushed by the pandemic last March,” Richard said. “Investors scarpered, there was little hope factored into share prices, and no consideration that these businesses might survive – it was act now, ask questions later.
“And it has been a real game of two halves to reach our current point. The market is keen to pigeonhole investors: you are either value or you are growth. But we think things are more nuanced than that: quality growth performed well last spring, while value was hammered – but since November’s announcement on vaccines and the UK’s subsequent successful vaccination programme, value has roared back! Many months of outperformance by growth stocks were wiped out in a day, Covid winners became losers, and vice versa.
“A lot of stocks on both sides have ended up back where they were, albeit via different routes. Morrisons^, for example, did very well initially due to sheer volume of business as toilet roll was anointed the new gold. Now, however, on the back of extra costs to remain competitive while lockdowns kept the crowds away, it has returned to pretty much where it was pre-Covid.
“On the flipside we have the likes of Wetherspoons^: initially, as pubs closed, its share price plummeted; but now, following some extra fundraising and the prospect of pubs reopening indoors, its share price is almost exactly where it was a year ago*. Two businesses travelling different routes but, like salmon, returning to the same location.
And now, more than a year on from Covid, we are entering extra time, but what will the final result be?! The proliferation of quantitative investors, ETF basket trades and factor-based investing is throwing up some interesting themes and companies that do not fit the narrow growth/value definition. They are left in the middle.
“In our view, the UK remains cheap, a reflection of divestment out of the UK asset class and, latterly, the uncertainty around Brexit and Covid,” continued Richard. “But that uncertainty has now been removed, and the market offers global exposure alongside attractive foreign exchange and governance factors – a valuation arbitrage remains with global firms listed in the UK trading at material price-to-earnings discounts relative to foreign competitors.
“Much like at football grounds, we are now seeing the crowds return to the UK marketplace. This is the irony: it is these new faces in the crowd – overseas investors who have perhaps not been emotionally scarred by being in the UK over the past few years – who are set to reap the rewards, rather than UK-based investors – or traditional season ticket holders, if you will – who are fearful of another “recovery” fizzling out and are instead shopping for global growth products.
“But the UK remains a rich hunting ground. It has rallied a long way in some of the most distressed areas, but we feel there is still much further to go. For us it is not just because value has perked up or because inflation might be coming down the track – as active managers we consider it a broader reappraisal of UK companies quoted on the UK stock market.”
For those wanting to invest in UK equities, here are four different types of fund to consider:
As pioneers of responsible investing, EdenTree offers even the most discerning client a justifiable investment opportunity. Although it can invest in companies of any size, EdenTree Responsible & Sustainable UK Equity is very different from many of its peers as it invests in a large proportion of smaller and medium-sized companies.
Murray Income Trust is all about building a portfolio of high-quality companies which deliver a resilient income, as well as offering strong capital growth prospects. It is a dependable, diversified and differentiated trust, which has delivered consistently strong performance at a time when it has been challenging for UK equities.
Unlike many other UK equity long/short funds, the managers of Sanlam Enterprise generally don’t use ‘futures’ (contracts for shares bought at an agreed price but delivered and paid for later) to provide their short exposure (when they are hoping to make money from falling share prices).
This is a small, flexible fund with a solid investment process and a highly competent team. We like the focus on company fundamentals and understanding businesses in detail. The fund is also quite concentrated, which allows it to capture the performance from its best ideas.
^Mention of specific stocks should not be taken as a recommendation to buy or sell.
*Source: Bloomberg, January 2021