Build Back Better
Are you ready for a renaissance in UK equities…?
<b>BUILD BACK BETTER
Are you ready for a renaissance \in UK equities…?
UK Equities – Why Now?
**Darren Winder**
Partner, Lazarus Economics
UK Equities – Why Now?
Darren Winder Partner, Lazarus Economics
Inflation has returned, well above forecasts. It is turning into a significant headwind. But are there mitigating factors that will help to see us through the ‘cost-of-living’ crisis?
Consumers and companies both built up significant savings through the Covid-19 lockdowns. The banks have a surplus of deposits, keeping interest rates low while credit conditions remain supportive. Long queues at airports are one sign of excess consumer demand.
The government is keenly aware of the need to help. They have already moved to provide help with fuel bills. Should conditions deteriorate, they may well step in again.
Growth has been weak, but these are short-term figures. There is evidence of people returning to the labour market, motivated by the higher cost of living but also by higher earnings. The UK wage bill is £1 trillion a year. A 5% increase is £5 billion.
Consumer confidence is ebbing but spending is high. This is reflected in tax receipts at the Treasury, which are at substantial highs. Don’t listen to what they say. Look at what they do.
Inflation is driven by energy prices
JOHCM UK \Equity Income Fund
**Clive Beagles and James Lowen**
Senior Fund Managers
JOHCM UK Equity Income Fund
Clive Beagles and James Lowen, Senior Fund Managers
It’s Interest Rates, Stupid!
The aims and direction of monetary policy have reversed. We are in the opening months of a regime-shift. Investors will need to radically re-think their asset allocation.
The skew to growth in recent years has been very powerful. There was a logic to it when the cost of capital was zero or even negative. But that time is already gone. Future capital will come with a cost and investors need to think of a commensurate cash return, in other words, dividends.
UK valuations are low relative to their own history and to other markets. The people buying the market are private equity funds, who see the value on offer. The other people buying UK equities are companies. All the major banks are buying back shares, as are many other firms.
UK equity valuations historic lows
A key characteristic of the UK equity market is the amount it generates in dividends, in live cash flows. In recent years, the quality of the dividend yield has improved, falling as a proportion of total earnings.
Future capital will come with a cost and investors need to think of a commensurate cash return, in other words, dividends.
Clive Beagles and James Lowen, Senior Fund Managers
JOHCM UK \Opportunities Fund
**Rachel Reutter and Michael Ulrich** \Senior Fund Managers
JOHCM UK Opportunities Fund
Rachel Reutter and Michael Ulrich, Senior Fund Managers
Look Beyond the Misconceptions
UK equities are boxed off under three egregious misconceptions.
1. Active vs Passive
Investors see the UK market has dominated by active managers and see valuations as being the logical result of fundamental research. This is not the case. The market is dominated by passive funds and valuations are determined by robots.
2. Low Growth
The market is overshadowed by supersized stocks in the FTSE 100 and the assumption is that they reflect the market as a whole. But if we look at the number of companies, rather than capitalisation, we see that the UK is a highly diversified market.
3. Deep Value
See above. The predominance of supersized value stocks overshadows the entire market, with many investors holding the misconception that the UK is nothing other than ‘deep value’.
Contrary to these misconceptions, the UK market is distinctly varied and offers investors a wide range of excellent choices with diverse sources of growth and income. Sectors where the UK leads are likely to increase in importance in the future, including energy transition, pharmaceuticals, defence, infrastructure and natural resources. Valuations are low, attracting significant interest from private equity funds.
Private Equity can see the fantastic opportunities
UK experiencing high levels of M&A
The UK market is distinctly varied and offers investors a wide range of excellent choices with diverse sources of growth and income.
Rachel Reutter and Michael Ulrich, Senior Fund Managers
JOHCM UK
Growth Fund
**Mark Costar and Vishal Bhatia** \Senior Fund Managers
JOHCM UK Growth Fund
Mark Costar and Vishal Bhatia, Senior Fund Managers
Opportunity in Change
From a zero cost of capital to higher cost. From easy multiple expansion to risk of compression. Regime shift is here and it has only just started. Markets have been irrational and are now correcting.
In the context of the UK, a clear agenda is emerging. It presents a powerful intersection of structural change.
Brexit
We can expect increased spending on infrastructure, on rail, roads, renewable energy, waste-to-energy, electric vehicles. Less regulation will release bureaucratically trapped capital.
Covid
The pandemic accelerated long-term trends toward cloud computing, remote working, digitisation, a re-focus on life priorities, on wellbeing, the environment.
Ukraine
The conflict in Ukraine has led to a redistribution in the geopolitical map. It is speeding up deglobalisation, drawing a renewed emphasis on security, in defence, supply-lines, energy.
Where compression is a risk, the starting price is crucial. UK valuations are low to the point of ludicrous. Successful companies trade for less than the value of their tax losses, or for less than their own net free cash. The interest of private equity is telling you that prices are wrong.
For investors in UK equities, the opportunity is there to profit from change.
The Cyclical Factors: Profound change
In the context of the UK, a clear agenda is emerging. It presents a powerful intersection of structural change.
Mark Costar and Vishal Bhatia, Senior Fund Managers
JOHCM UK
Dynamic Fund
**Alex Savvides**\Senior Fund Manager
JOHCM UK Dynamic Fund
Alex Savvides, Senior Fund Manager
Investing in Better
The purpose of the UK Dynamic strategy is to support businesses changing for the better. We are looking for strategic challenges, for the opportunity to pivot to growth.
We seek to effect transformation.
Our differentiation is engagement. We actively shape the strategic direction of the companies we invest in. The more you are engaged, the more you act like an owner. We always ask ourselves – if we owned the whole business, how would we allocate capital.
We seek to harness idiosyncrasy. We welcome new management, who bring fresh energy, discipline, strategic vision. We look for real assets, for long-term investment in long-term cash flows.
The UK Dynamic operating model: creating better businesses
Sustainable business improvement in an evolving world
Sustainability
**Tom Matthews** \Sustainable Investments Senior Manager
Sustainability
Tom Matthews, Sustainable Investments Senior Manager
Truth, Not Opinion
The current world is not sustainable. In a typical year, we have consumed our social and environmental resources by the end of July. The rest of the year is irreplaceable extraction.
Sustainability is about regeneration, stability. It is companies thinking holistically about stakeholders, about the environment. Those are the companies that will survive and prosper.
It is not about screening or being driven by ratings, which tend to make the measurable important. They are just opinions, forecasts. They are not facts. We need to make the important measurable, embracing qualitative issues as well as quantitative.
Our approach is structured and holistic. We are interested in the truth, in tools that provide facts rather than opinion.
Sustainability is a by-product of systemic health
When eco-systems are sufficiently healthy to remain stable or regenerate
A life without limits
**Chrissie Wellington** \Four-time Ironman Triathlon World
A life without limits
Chrissie Wellington, Four-time Ironman Triathlon World
Ironman triathlon
2.4mile (3.8km) swim
112 mile (180km) cycle
26.2 mile (42.2km) run
Seize every opportunity and make your mark on the world, for all the right reasons.
Chrissie Wellington
The Home of UK \Equity Excellence
The Home of UK Equity Excellence
J O Hambro is the home of UK equity excellence. We have a rich 20-year heritage investing in the UK, accounting for nearly £5 billion in client funds and managed through four market leading investment strategies.
We are committed to active, differentiated fund management with individual investment teams given full autonomy to deliver high-conviction investment solutions. The long tenure of our fund managers is testament to the success of our approach. Average industry experience for our senior managers is 24 years, whilst three of our four strategies have been managed by the same team since inception, a level of dedication that we believe supports superior long-term returns for clients.
To learn more about our UK equity excellence you can click here or contact us through your usual representative.
All data as at 31 May 2022.
Which UK sector do you think will perform the best in 2022?
- Financials
- Consumer Discretionary
- Industrials
- Energy
- Technology
- Utilities
- Health Care
- Consumer Staples
For Professional Investors Only
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