July 2024
This is a marketing communication
The UK equity market is currently seeing valuations at historic lows. But with improving economic sentiment, an expected upturn in M&A activity and the potential for government intervention, is the tide about to turn? The Portfolio Managers of the JPMorgan Claverhouse Investment Trust (JCH) believe it won’t be long before the discount narrows. JCH offers a robust choice with diversified exposure to UK high quality large-cap stocks and a track record of 51 years of dividend growth.
UK equity valuations present a once-in-a-lifetime discount opportunity
Fund managers investing in UK companies have had to be very patient investors over the last few years. But as Callum Abbott, co-portfolio manager of the JPMorgan Claverhouse Investment Trust (JCH), explains, the current investment case for UK equities can hardly fail to sway anyone who believes that valuation remains a key element of successful investment management.
“The UK market is just very, very cheap: it really is a once-in-a lifetime discount opportunity,” he argues, pointing to the MSCI UK index’s current 40% discount to the MSCI World index.
Source: J.P. Morgan Asset Management using data from MSCI, I/B/E/S, Morgan Stanley Research. Based on PE (Price to Earnings), PBV (Price to Book Value) and PD (Price to Dividend). Average relative valuations use 12 month forward data where available. Data from 31 January 1974 to 25 January 2024.
On a historical perspective, although it may feel to many investors as though cheap UK stocks are a permanent fixture, things haven’t always been like this.
As the graph above highlights, UK equities traded at a premium to their long run average versus the world index through the late 1970s and and early ‘80s, and were also at a premium in the second half of the 1990s. But since the Brexit vote of 2016, domestic stocks have endured a persistent and painful derating.1
Similarly, the UK market’s price-to-earnings (P/E) ratio which is a good indicator of how valuable the market considers it to be – having reached highs of over 24 or 25 times since the start of the millennium – is now at much lower levels, at just around 10 times at the start of 2024. Of the major regional markets, only China’s P/E ratio is at a comparably depressed level – and as Meadon observes, “China has much greater economic woes than the UK.”
Source: Bloomberg as at 25 June 2024.
Yield is a further measure where the UK is demonstrably cheap, at 6.3% compared with other developed market yields in the 3% to 5% range. At least patient investors are being rewarded with an attractive income while they wait for the valuation tide to turn.
Source: J.P. Morgan Asset Management using data from MSCI, I/B/E/S, Morgan Stanley Research. Yields use trailing 12-month data. Data as of 19 October 2023. Past performance is not a reliable indicator of current and future results.
Significantly, a full 2.5% of that meaty payout is coming from UK share buybacks,2 with sectors such as tobacco companies, miners and banks all increasing their focus on buying back their own shares at rock-bottom prices, rather than investing elsewhere. The JCH team believes that buyback boom could help to swing sentiment in due course.
Why are UK valuations so low?Of course, it’s important to ask why the UK, in particular, has derated so much in recent years. In large part, it’s a reflection of structural moves forcing the price-insensitive selling of domestic equities.
Legislation is a key factor, Meadon says, with regulatory changes pushing institutional investors - pension funds, insurers, asset managers – to de-risk their portfolios away from equities and towards bonds.
Benchmark changes are another. The US accounts for some 71% of the MSCI World index, while the UK has a weighting of just 4%3: such shifts will inevitably have an impact on the make-up of both passive and active portfolios. And as already mentioned, Brexit has been a third contributor to the broad sell-off.
Is the tide about to turn?The Claverhouse team anticipates that a shift in sentiment is coming. “We are clearly much closer towards the end than the beginning of the price-insensitive selling process, which has caused this generational low point in valuations,” Meadon argues.
One catalyst for change could be government action, he says. Chancellor Jeremy Hunt is well aware that regulatory changes have made the UK a less attractive proposition for investors in recent years, and that steps need to be taken to improve the situation.
A second potential catalyst is an expected upturn in M&A activity. It’s already in evidence among smaller companies, and there are now signs of a pick-up among large caps too: Meadon points to the recent Barratt bid for fellow house builder Redrow, and to packager Mondi’s plans to bid for DS Smith.
If change is on its way for UK markets, the attractions for patient investors are compelling. UK economic indicators are gradually improving (although the global geopolitical backdrop remains fraught), and the fact that UK equities are trading at multi-generational lows means that in effect they are providing access to world-class companies at bargain-basement prices compared with their peers trading on other major markets.
Claverhouse: 51 years of dividend growthAgainst that backdrop, we feel that JCH is a robust choice. Not only does it comprise only UK stocks undiluted by overseas holdings – unlike many of its rivals in the UK equity income sector – but it has regularly outperformed its benchmark, the FTSE All-Share index, not that we can guarantee the future.
The trust takes a barbell approach, investing in a range of growth and value-focused stocks. Such a philosophy will never result in table-topping returns, Meadon explains, but it provides a valuable element of natural diversification and risk reduction.
Better still, JCH pays a chunky yield providing some compensation to bridge the gap until valuations strengthen. It has also built up a valuable track record of unbroken dividend growth, with 51 consecutive years of rising dividends under its belt backed by robust revenue reserves, to support future payouts.
Not that dividends can be guaranteed but as JCH co-portfolio manager Callum Abbot observes, the trust has achieved compound annual dividend growth averaging 9%4 over those 51 years, providing “meaningful uplift” in comparison with UK dividend growth averaging around 6%5 and inflation 5%6 a year over that period.
Even over the last three challenging years of high inflation, dividends have increased broadly in line with price rises. “Importantly, we’ve been able to keep delivering real growth for our investors,” Abbot adds.
Signs are that the time is coming when JCH investors can look forward to growth from improving blue-chip valuations as well as robust dividends.
1 Source: J.P. Morgan Asset Management using data from MSCI, I/B/E/S, Morgan Stanley Research. Based on PE (Price to Earnings), PBV (Price to Book Value) and PD (Price to Dividend). Average relative valuations use 12 month forward data where available. Data from 31 January 1974 to 25 January 2024.
2 Source: J.P. Morgan Asset Management using data from MSCI, I/B/E/S, Morgan Stanley Research. Yields use trailing 12-month data. Data as of 19 October 2023. Past performance is not a reliable indicator of current and future results.
3 Source: Factset as at 31 May 2024.
4 Dividend growth is calculated as the compounded annual growth rate of dividends paid by JPMorgan Claverhouse Investment Trust plc(excluding special dividends)over the period1972–2023. Dividend paid by the product may exceed the gains of the product, resulting in erosion of the capital invested. It may not be possible to maintain dividend payments indefinitely and the value of your investment could ultimately be reduced to zero. Dividend payments are not guaranteed.
5 Source:Citi,MSCI trailing data, UK DPS saw 5.7% annualized growth from March 1972 to March 2023.
6 Average inflation calculated from Bloomberg data for UKCPI over the period 1972-2023.
Learn more about The Claverhouse Investement Trust plc
Summary Risk Indicator:
The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.
Investment Objective:
The Company aims to provide a combination of capital and income growth from a portfolio consisting mostly of companies listed on the London Stock Exchange. The Company’s portfolio consists typically between 60 and 80 individual equities in which the Manager has high conviction. The Company has the ability to use borrowing to gear the portfolio within the range of 5% net cash to 20% geared in normal market conditions.
Risk Profile:
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Where permitted, a Company may invest in other investment funds that utilise gearing (borrowing) which will exaggerate market movements both up and down.
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This Company may use derivatives for investment purposes or for efficient portfolio management.
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External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
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This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
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This Company may also invest in smaller companies which may increase its risk profile.
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The share price may trade at a discount to the Net Asset Value of the Company.
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The single market in which the Company primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies.
Disclosures
This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained in English from JPMorgan Funds Limited or at www.jpmam.co.uk/investmenttrust. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.
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