The UK’s experience with Covid and the return of fans to sporting events have a lot of similarities, according to Columbia Threadneedle head of UK equities Richard Colwell.
“At times during 2020, investing in the UK felt a little like the football experience we endured during the past year – without the crowds, it was indeed a lonely game,” he said.
“Animal spirits, dampened already by protracted Brexit negotiations and the resulting uncertainty, were crushed by the pandemic last March.”
Colwell continued: “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.”
At the height of the sell-off, when UK equities fell by about 20 per cent, the manager argued that conditions such as this – when it feels most uncomfortable – can be the best time to invest.
The fear of missing out – FTSE All Share total cumulative return (1998-2021)
Source: Columbia Threadneedle Investments
“After all, we know the dangers of market timing – in particular, when you get it wrong,” he added.
“We are pleased we held our nerve, leaned in and bought more of these apparently beleaguered firms.”
The manager stuck with the football analogy, describing the UK’s Covid experience as a game of two halves.
“It has been a real game of two halves to reach our current point,” said Colwell. “The market is keen to pigeonhole investors: you are either a value roundhead or a growth cavalier.”
The reality is more nuanced than that in the UK, even with the clear value resurgence that came from the announcement of viable Covid vaccines.
“Many months of outperformance by growth stocks were wiped out in a day,” he added. “Covid winners became losers, and vice versa, and a lot of stocks on both sides have ended up back where they were, albeit via different routes.
He used Morrisons and Wetherspoons as two key examples of this.
“Morrisons 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.”
He remarked that the supermarket chain hasn’t thrived in the opening-up trade, nor did it have an overwhelming 2020 from the crisis.
“On the flipside, as pubs closed, Wetherspoon’s share price plummeted, but following some extra fundraising and the prospect of pubs reopening indoors, its share price is almost exactly where it was a year ago,” he added.
“Two businesses travelling different routes but, like salmon, returning to the same location.”
Regardless, the UK remains cheap because of the long-standing uncertainty around Brexit and Covid.
“Now that uncertainty has been removed, and the market offers global exposure alongside attractive FX 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,” he said
This has led to a large uptake in M&A.
Global asset allocators had been reluctant to redress UK equities underweight
Source: Bank of America Merrill Lynch Global Fund Manager Survey, April 2021
Much like at football grounds, Colwell said we are now seeing the crowds return to the UK marketplace.
“To extend the football metaphor, the UK has been languishing in the relegation redzone for the past few years, but it is now less hated by overseas asset allocators and is climbing the table and challenging for a place in Europe,” he said.
“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.”
However, he explained that the UK is quite capable of outperforming for a sustained period, as it did between 2000 and 2007.
UK stock markets relative to US
Source: Longview Economics
This, Colwell added, was not simply a value rotation, but a more slower reappraisal, “pound for pound across the UK marketplace.”
“It is not just about deep value and it is not just about high quality growth – there is more to UK equities than this,” he said. “We still want optionality to cover multiple scenarios. A midfield general, so to speak, good at defence but able to score goals.”
He concluded by saying the UK is a stock picker’s market and active engagement and fundamental research will allow for the hidden gems to be uncovered.
“We also have a say in stewardship and governance, and to return to football a final time, something the big six might have considered before the ill-fated European Super League break-away,” said Colwell.
“We will be pragmatic and patient as the recovering UK looks to deliver on the opportunities it has promised for the best part of a decade.”