Kathleen Hunter, investment specialist director at Baillie Gifford argues that when it comes to UK equities, LGPS investors can benefit from looking beyond the negative headlines.
It’s fair to say that the UK market is no stranger to negative headlines but are investors perhaps missing a trick? A closer look at the figures reveals that UK-listed companies are trading at a notable discount to global peers, creating an attractive hunting ground for active stock pickers. However, stock selection is still key because there is a wide dispersion in the growth outlook for British businesses.
An attractive hunting ground
UK equities are trading at a notable discount to global peers, the biggest mark-down we have seen in our working lives. This has created a very attractive hunting ground for active stock pickers. For example, when we look at UK-listed companies, their valuations are now trading at around a 35 per cent discount to global peers.
Valuations
Source: Baillie Gifford & Co, Factset and underlying index providers, 30 September 2003 to 30 September 2023.
This is not to say that cheaper is necessarily better. In some cases, there are good reasons for UK businesses to be trading at lower valuations. But this market backdrop does create an interesting opportunity for active investors who are aiming to carefully select mispriced growth companies.
Stock selection is still key
The graph below highlights the wide dispersion between the growth outlook for the broad UK equity market compared to our two UK Equity strategies. While we would avoid relying too heavily on spuriously precise earnings forecasts, it is encouraging to note that our funds are invested in companies with significantly higher growth expectations than the broader market.
Why does this matter? Our investment philosophy is anchored around a core belief that share prices will follow fundamentals over the long term. Therefore, enduring growth should act as a catalyst for long-term share price appreciation. This is why we try to identify companies with superior growth characteristics and hold on to them long enough for their unique strengths to emerge as the dominant influence on share prices.
We can invest in regional champions at an earlier stage
Having a team of investors focused solely on the UK market gives us the best opportunity to uncover the hidden gems and back our regional champions. It allows you to access companies at an earlier stage of their growth. For example, over 75 per cent of companies in the broad global equity index have a market cap of over £25bn. The inverse is true for our UK equity portfolios.
The companies we invest in are not always household names, but in many cases, they are true world leaders in their fields with enviable competitive positions that rivals find hard to match. And they are operating right across the country.
Access to earlier opportunities
Source: Baillie Gifford & Co, Factset and underlying index providers, 30 September 2023.
Our local heroes operate on a global stage
Investing in the UK equity market is not the same as investing in the UK economy. Almost 80 per cent of the revenues generated by UK-listed companies come from overseas, so these businesses are exposed to a range of global themes and international demand for their products.
FTSE All-share revenue exposure
Source: Baillie Gifford & Co and FTSE, 30 September 2023.
Access to international demand
- Renishaw
94% revenues from overseas
This is a world-class engineering company that has developed unparalleled measurement technology. Its high-precision tools are now being applied across a wide range of industries, from aerospace to neurosurgery. Despite residing in a picturesque market town in Gloucestershire, Renishaw generates only 6 per cent of its revenues in the UK. A far greater influence on its sales comes from customers in China, Japan and the US which account for over half of its revenues.
- Games Workshop
78% revenues from overseas
A manufacturer and retailer of fantasy tabletop games and miniature figurines. It has developed a leading fantasy/sci-fi franchise nurtured over decades, with a core base of passionately devoted customers. Its addressable market is expanding as the hobby continues to gain in popularity in the large US market and is beginning to develop in the Far East. The business is now more focused on monetising its deep pool of intellectual property across the broader media space.
- Ashtead
92% revenues from overseas
Founded in the village of Ashtead, Surrey, in 1947, Ashtead is now the largest equipment rental company in the UK and second largest in the US, with stores across 49 states. With a leading market position, we believe the business is well placed to benefit from a structural shift from buying to renting large expensive equipment, which provides it with a long runway for future growth. You can read more analysis on Ashtead’s growth story here.
Games Workshop, manufacturer and retailer. © ton koene/Alamy Stock Photo
The UK has a supportive ecosystem for growing businesses
The UK is Europe’s top financial centre for fast-growing tech companies and consistently outperforms in the creation of so-called ‘unicorn’ start-ups . A recent study by the City of London Corporation highlighted several structural factors that make the region an attractive place to start and scale a company. They include innovation, financial reach, legal environment, business infrastructure and talent.
With four of the top 10 universities in the world, British businesses have access to a world-leading pool of highly qualified talent. This gives both incumbent businesses and startups access to cutting-edge research and to the talent they need for their firms to succeed.
London and the UK perform consistently well across all competitive measures
Source: City of London Corporation 2023, Our Global Offer to Business: London and the UK’s competitive strengths in support of growth.
Conclusion
The current market backdrop has created an attractive opportunity for stock pickers to invest in UK companies at relatively cheap valuations. Taking an active approach to investing in the UK equity market enables us to seek out exciting growth opportunities, invest in them at an early stage and gain exposure to a range of global themes – all within a robust regulatory framework. And we are finding these opportunities right on our doorstep.
If you would like to hear more about Baillie Gifford’s UK Equity strategies, please contact Kathleen Hunter, investment specialist director at UKEquityClientGroup@bailliegifford.com, or visit bailliegifford.com for details of the funds available to UK individual investors.
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The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in November 2023 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.
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