Discretionary Investment Management | Ravenscroft Group | Toby Peatfield
14 Sep 20
Weekly update - Is it time to consider UK investment opportunities again?
This week's update comes from the advisory investment team in Guernsey.
When looking at the US markets, you would be forgiven for thinking that this whole Covid-19 thing had been and gone already. The “coronavirus crash” proved pretty short lived for US stocks, and its global tech giant members have driven a strong rebound to new record highs.
Questions that might come to mind would include: why has the US market soared and do these big tech firms justify their run? Is the Federal Reserve's cheap money a safe bet and are investors paying significant enough attention to the damage that coronavirus might yet to inflict on the American economy?
Using Bloomberg* for all of the following statistics, and with p/e representing the average constituent share price (p) relative to those constituents’ earnings (e) we find:
NASDAQ p/e ratio 32.06
S&P500 p/e ratio 24.87
FTSE p/e ratio 19.05
For what it is worth, all of these are above historic norms, but the UK market is far closer to its usual average as it wallows in relative doldrums, bobbing along just above the 6,000 level as we type.
Does this make the UK a better bet than the US then? Well, by way of an eye-watering example for you to consider, the market capitalisation of Apple Inc in GBP sterling was some £1.49 trillion as at close of business on Friday. Let’s compare that to the FTSE100 market capitalisation of £1.66 trillion.
Can Apple really be nigh-on as valuable as all of the FTSE100 companies put together?
[Whilst we are at it, can Tesla (market capitalisation $347 billion) be worth seven times the value of BMW (market capitalisation of $49 billion) especially when we consider that, in 2019, Tesla delivered 367,500 vehicles whilst BMW delivered over 2.5 million vehicles, of which 146,000 had some form of electric powertrain.*]
At this point, we can hand over to Kevin Boscher, chief investment officer at Ravenscroft, who opined recently that:
"The UK has suffered one of the biggest declines in activity and will, almost certainly, recover from the Covid-19 shock at a much slower pace than most other advanced economies for three main reasons:
- Firstly, the government does not appear to have managed the crisis as well as other countries and the economy is emerging from lockdown both later and at a slower pace.
- Secondly, the major uncertainty caused by Brexit is acting as another constraint on both consumption and investment with the likelihood of a “hard” Brexit increasing.
- Thirdly, a larger share of the UK’s GDP comes from consumption and sectors that are restrained the most by social distancing.
Given this background, it is perhaps little surprise that UK equities have continued to lag the global recovery, especially the more domestically focused small and mid-cap sectors. The FTSE 100 index has also struggled to keep pace with other large cap indices, partly because the composition of the index is heavily geared towards some of the more problematic industries, such as energy and financials. In addition, a weaker dollar negatively impacts both revenues and earnings for many companies whilst the UK market is also less geared towards the dominant and momentum driven technology sector.
Despite the challenging macro outlook, we are relatively optimistic on the prospects for UK equities on a longer-term view. The combination of extremely accommodative domestic and global monetary and fiscal policies, an undervalued pound, pent-up demand and improving sentiment will eventually lead to a powerful economic and earnings recovery. In addition, UK equities and sterling look cheap on both an absolute and relative basis with much of the bad news already likely discounted."
We do not appear to be alone in thinking that the right UK investments should be considered at this time. It was with some interest that we recently learned of a new investment trust, the Tellworth British Recovery & Growth Trust, being proposed, which will be the first post-Covid-19 launch seen by the London Stock Exchange, The fund will seek to generate long-term total returns over a rolling five-year period by investing principally in UK listed companies with a significant presence in the UK.
To learn more about this, or our own favourite UK stock ideas, please do not hesitate to contact us.
*Bloomberg as at close of business 11.09.2020