Four Reasons to Watch UK Equities

Over the past several years, UK equities have traded at a relative discount compared to other developed markets. This was largely due to ongoing Brexit negotiations, where uncertainty around trade deals and other legislation created significant headwinds.

Fast forward to today, and much of the uncertainty has passed. Does this mean it’s time to invest in the UK?

Looking Ahead

This infographic from BlackRock covers four reasons for why investors should consider an allocation to UK equities.

So, why should investors consider an allocation to UK equities?

#1: The UK Market Is Not the UK Economy

The UK equity market is represented by many leading multinational companies from a variety of sectors.

For example, consider the FTSE All-Share Index, which contains over 600 companies listed on the London Stock Exchange. As of March 31, 2021, 72.5% of these companies’ total revenue was derived from outside of the UK.

A large share of overseas revenue provides investors with exposure to a range of global themes, where outcomes are not dictated by the UK economy itself.

#2: Business Activity is Ramping Up

The confirmation of a Brexit trade deal has provided UK companies with clarity around the rules of engagement, as well as the confidence to look ahead.

As a result, the UK has been ranked as the most attractive place in Europe for future investment.

Based on the results of 550 C-suite interviews. Source: EY (2021)

This optimism has also spread to the UK equity market, where initial public offering (IPO) issuance in the first half of 2021 has already exceeded the entirety of 2020.

Source: London Stock Exchange (2021)

Among those 47 IPOs were a number of high profile tech companies including Moonpig (online greeting cards), Darktrace (cybersecurity), and Deliveroo (food delivery).

The UK’s venture capital scene is also thriving, with U.S.-based Sequoia opening its first European office in London. Sequoia was an early investor in world-class businesses such as Apple, Google, and Airbnb.

#3: UK Firms are ESG Leaders

UK companies have historically been early adopters of environmental, social, and governance (ESG) practices. In fact, 45% of FTSE 100 companies have begun integrating ESG metrics into their executive compensation schemes.

UK firms are also leaders in gender diversity, consistently tracking ahead of other developed markets.

Source: MSCI (2020)

This leadership may bring further interest to the UK equity market, especially as awareness around social issues continues to rise.

#4: UK Equities Can be a Compelling Source of Income

Over a 10-year time frame, UK dividends rates have exceeded those of other global markets.

Source: Barclays Research, Refinitive (2021)

This outperformance even lasted through the COVID-19 pandemic, when dividend rates around the world were rebased (a term used for dividend cuts).

Beware of Zombies

While these factors provide UK equities with an attractive backdrop, the presence of zombie companies has dragged down the performance of the overall market.

Zombie companies are ones that are close to insolvency and do not generate enough profits to pay off their debts. Their survival is only made possible due to record low interest rates, which allows them to continue borrowing instead of shutting down.

So how many zombie firms are operating in the UK equity market?

According to Onward, a UK-based think tank, roughly one-in-five UK companies had become zombified in March 2020. Because of this, investors may find an actively managed approach to be beneficial. Unlike an index ETF, actively managed funds have the ability to avoid unprofitable businesses.