The thesis
The UK equity market has underperformed the global ex-UK benchmark in eight of the last ten years. This long period of sub-par performance has culminated in the UK equity market trading on close to half the rating of the S&P 500, and at a significant discount to nearly all of its developed economy peers. This poor period of performance is in part explained by the UK market's lack of a scaled technology sector, but it is also the product of persistent domestic and international institutional selling, catalysed by the lagged effects of adverse accounting and regulatory changes, Brexit and economic mismanagement during and after the global pandemic. Despite these headwinds, the economy has performed in line with its European peers and, taken as a whole, the UK equity market delivers an attractive 15.5% return on equity, which compares favourably not only with other markets across Europe but also with the US.
Generally robust earnings growth through this period, combined with poor price performance, has resulted in the UK market rating declining, but conversely has also led to a gently rising market dividend yield, which at the start of the millennium was close to 2% and is now close to 3.5% on a relatively depressed payout ratio below 45% in 2027.
It is this combination of poor equity market performance combined with relatively robust UK corporate performance that has led to the valuation discount that now prevails in the UK. This playlist contains companies from across the UK equity market that are predominantly exposed to the domestic economy and which analysts predict will perform well as the economy recovers from the travails of high inflation and interest rates that followed the outbreak of the war in Ukraine.
Key themes
- UK financials with a particular emphasis on banks, both UK and international
- UK office and retail property businesses
- UK housebuilders and building materials companies
- Retailers and leisure businesses
