The valuations at which UK equities presently trade are such, that the political risks which have hobbled the asset class, are now “absorbed”, according to Steve Magill, head of the Global Value Equity team at UBS Asset Management.
Of the £6bn run by his team, around £3bn is in UK equity mandates.
Speaking to FT Adviser, he said that although there have been long-term shifts in global investors attitudes to UK equities, much of it based on the composition of the market, it was also the case that investors attached a higher risk premium to UK equities after the 2016 Brexit referendum result.
Magill said: “I can understand why they did that, as the political climate increased the level of uncertainty around investments, and indeed the level of business investment in the UK has fallen.
But I think whatever the consequences of Brexit, they have been felt in the economy, now the market has absorbed them via the discount on UK shares.”
Magill also noted the longer-term issue of allocators moving to passive and to global, rather than regional funds, as something else that had impacted the UK.
In his view this trend is likely to continue, although it will be abated somewhat by the desire of some to allocate to more cyclical equities, something which he regarded as a tailwind for the UK market as economic conditions globally improve, whereas previously he believed it was a headwind.
Much has been made of the discount at which UK companies trade relative to US peers.
Magill believes an element of this discount will always be justified, as “the US is a big open market”, but said in some specific sectors of the stock market it was less sensible.
He highlighted oil as an example of this, where the multiple at which US large oil companies traded was much greater than that which UK-listed oil companies, such as Shell traded.
Magill said he found this “curious” as the companies sold a commodity product – so it is the same price for all buyers – and quite often were partners on the same projects to actually extract the oil.
Oil is one of the three sectors in which Magill is a keen investor right now, believing that it, alongside mining and banks are good investments for this point in the cycle.
His rationale for owning mining stocks right now is that in the years after the global financial crisis there was a structural “underinvestment” in new mines, meaning the supply of commodities such as copper was restricted, relative to demand for the metal.
Magill likes bank stocks right now. He feels interest rates will settle at closer to the longer-term UK average level of 4 per cent, than?? the near zero level of rates to which markets had become accustomed.
With that in mind, he feels the valuations of banks should improve.
Magill’s comments come in light of the FTSE 100 nearing an all time high at the index level, something, of which UK fund manager Alex Wright said some of the often-cited reasons for the underperformance are largely (geo)political and more recently the disproportionate impact of the pandemic.
Wright added: “These headwinds are now abating and indeed UK equities have been holding their own of late, although few appear to have noticed.”
