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UK equities – it’s not all doom and gloom

20 November 2023

There are not many reasons to avoid UK equities, in fact there is an opportunity to pick up shares in leading businesses at decade-low valuations.

As investors continue to avoid UK equities, stories of their demise are greatly overstated. Negative reports and attitudes towards the stock market are dragging on and keeping sentiment low.

Since the Brexit vote of June 2016, popular media has consistently concluded that the UK is a ‘basket case’ and politicians too have done little to help this.

Yet, despite Brexit negativity and volatility with the Covid pandemic, the FTSE 100 and FTSE 250 are up 55% and 25% respectively on a total return basis since the June 2016 vote. 

Like many investors, we have the bruises to show that we have been in the market over the past few years, but to avoid the market entirely is to tar (and feather) all UK companies with the same brush.

There are plenty of excellent businesses listed in London and rule of law continues to reign. History has taught us time and again that patient and disciplined investment in strong businesses pays off and this time is no different.

It's in times like these that stock pickers really earn their crust. It’s not all doom and gloom out there and even in the UK, believe it or not, there are plenty of positive company news stories and investment themes that can be played.

Investors just need to look in the right places and stick to a disciplined approach to find value.

Pricing power

With the double whammy of stubborn inflation and higher interest rates, investors need to own businesses that have pricing power. As input costs rise, businesses must decide whether to stomach lower margins or raise the price of their products. Only the best can do the latter.

One such business that has been doing this successfully for over 100 years is Diageo. From whatever product you look at inside Diageo’s copious portfolio you will find exceptional brands all with positive attributes for the world we’re in today.

For example, the brand loyalty behind Guinness, means that our Mayfair local pub can charge £8.50 a pint for the black stuff, which customers will, and do, pay for. Margins can equally be maintained in their gin, tequila and vodka divisions where they are distilled and sold in the US. Factoring in recent dollar superiority, scotch whisky has never been so cheap for Diageo to sell into America.


Quality management

In the panic of the ‘Covid-crash’, in May 2020, Beazley came to market and raised $300m to strengthen the insurer’s balance sheet and invest in the business, with a focus on cybercrime, an area of risk that most insurers were busy trying to move away from at the time.

Looking back, the 315p price looks extremely shrewd, at a time where panic had set in and uncertainty was almost at its highest. Today, Beazley shares are north of 550p and the business is capitalising well as cybercrime premiums go through the roof.

One of our early steps of investing in quality businesses is researching their management teams and Beazley is certainly up there with the best in the Lloyd’s market.    

There are not many reasons to avoid UK equities, in fact there is an opportunity to pick up shares in leading businesses at decade-low valuations. Patience will pay-off and, in the meantime, there are healthy divided yields on offer to keep the income coming in.

Fred Mahon and Rory Campbell-Lamerton are managers of the IFSL Church House UK Equity Growth fund. The views expressed above should not be taken as investment advice.

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