So close and yet so far. And so, the eternal wait for another major international tournament win for the England men’s football team continues for at least another two years.
Despite never quite managing to set the tournament alight in terms of attacking play, England somehow managed to find their way into a second successive European Championship final only to be pipped at the post once more. Congratulations must go to Spain who, to our untrained eyes, appeared worthy winners on the night.
Whilst we might be making a leap drawing parallels, our wait for some positivity towards the UK equity market has, at times, felt decades long too, particularly in the area of mid-market equities. On numerous occasions recently we have postulated that sentiment towards the UK was so poor that it surely could not get any worse, only for it to go and do so.
Now however, we are starting to see what we hope will be a definitive positive change in the outlook for our much-beleaguered asset class. Our long-standing reasons for positivity remain, including a much more resilient economy than expected, depressed sentiment, exceptionally cheap valuations, and ongoing corporate M&A activity – $47bn in UK M&A deals so far in the year to 24th June 2024 compared to $25bn for the whole of 2023.
In addition to the above, the potential for a sustained period of political stability under the new Labour government, prioritising economic growth as a key policy initiative, appears increasingly appealing in the context of an ever more volatile political picture abroad.
Throw in rebounding consumer confidence, headline inflation back to target, and potential interest rate reductions in the months ahead, then the positive narrative becomes even more compelling.
Whilst it has, of course, been an extremely difficult few years in the UK mid-market universe, the relative performance of the FTSE 250 Index (excluding investment trusts) to the wider market over the past 25 years offers a reminder as to why we remain such enthusiasts – significant, sustained, relative outperformance being the ‘norm’ historically.
Zooming in on the most recent five-year relative performance, it is suggestive, to us at least, that likely as a result of the factors mentioned above, the period of mid-market underperformance is coming to an end.
As is often the case at the start of new major moves, assets tend to rerate ahead of underlying fundamental improvements and indeed this appears to be happening in UK mid-caps now.
Both from an absolute and relative valuation standpoint, there would appear to be plenty of scope to rerate further in due course.
Indeed, whilst the ‘mood music’ towards UK equities, and mid-caps in particular, has been improving noticeably of late, we contend that if this is the start of a fundamental reassessment of the attractions of UK equities there is much further to go in the months and years ahead.
From an international perspective, Bank of America’s latest global fund manager survey showed that exposure to UK equities increased eight percentage points in July. Whilst that represents the highest allocation in two years, it still shows a net 4% underweight the UK.
Meanwhile, from a domestic retail perspective, there has been absolutely no let-up in the relentless outflows from UK-focused retail equity funds so far, with over £1.3bn taken out in April alone.
So, will this recent improvement in sentiment prove to be another triumph of hope over experience or the start of a sustained, material reappraisal of the attractiveness of UK equities?
Only time will tell of course, but we are certainly of the view that, after what has also felt like an eternity, positivity towards UK equities, and the mid-market specifically, is coming home.
Simon Murphy is manager of the VT Tyndall Unconstrained UK Income fund. The views expressed above should not be taken as investment advice.