Negative sentiment combined with ‘a move by overseas investors to shun the UK’ have dragged UK equity valuations ‘back to the 1990s,’ according to the manager of RWC Partners’ TM RWC UK Equity Income Fund.
Citing figures from the Investment Association that show that around £13.2 bn ($16.5 bn) was withdrawn from UK equity funds between the start of 2016 and the end of Q1 2019, RWC says these outflows leave UK valuations ‘well below other regions’ thus ‘throwing open huge opportunities for investors as valuations reach depressed levels not seen this millennium.’
Adding that the dislocations being seen in the market today are ‘as extreme as we have seen for several decades’, Ian Lance, co-manager of the TM RWC UK Equity Income Fund, says: ‘UK equities are deeply, deeply out of favor today. We can see that via the asset allocation to the UK, which is pretty much at an all-time low.’
While he notes that ‘the valuation of UK equities is now standing at the biggest discount to MSCI World we have seen since the 1990s’, there’s more: the gap between UK dividend yields and bond yields ‘is as extreme as it has been since the First World War.’ He also describes sterling as ‘looking pretty undervalued’.
Lance does note, however, that the issue is one of sentiment rather than poor performance. Despite healthy profits within value businesses, he says heavy de-ratings of value companies is to blame – as ‘value as a style’ has ‘continued to perform poorly, with the dispersion between value equities and growth equities also at levels not seen for numerous decades.’
As a result, investors should see this as an opportunity, he adds.
Nick Purves, Lance’s co-manager on the fund, notes that the ‘last time we were seeing scenarios like this was at the height of the global financial crisis in 2009’, when the differential was between defensiveness and cyclicality – with defensiveness highly valued by the market and cyclical stocks valued very low.
‘These signals proved to be very powerful indicators and acting upon those then enabled us to deliver some very good returns for investors in 2009/2010,’ says Purves.