Stock Take
UK stocks climbed last week, as inflation returned to the Bank of England’s target 2% rate for the first time since 2021.
The data was revealed in the Office for National Statistics (ONS) monthly inflation bulletin for May. The 2% figure was down from 2.3% in April, and notably down from the 8.7% recorded in May 2023.
A monthly drop in food and non-alcoholic beverages contributed to falling inflation, while prices for furniture and household goods have also stabilised.
While this headline number is undoubtedly encouraging, beneath the surface, there is still some cause for concern for policy makers.
Specifically, services inflation remains above 5%, with the cost of eating out still increasing at a worrying pace.
Given the high services inflation and upcoming election, there was little surprise when the Bank of England (BoE) decided to keep interest rates at 5.25% when its Monetary Policy Committee (MPC) met last week.
Speaking on Thursday, Hetal Mehta, SJP’s Head of Economic Research, noted: “Today’s meeting was – thanks to the snap election – a ‘get out of jail’ card for the BoE. With no speeches or public statements during this period, it made sense for MPC members to keep votes unchanged and avoid a communication gap.”
“Moreover, recent strong wage data and still hot services inflation was not consistent with the dovish direction of travel. With GDP showing positive momentum – notable that the BoE revised up its Q2 forecast – inflation pressures will be slow to fade. Despite this, there seem to be some MPC members who voted for no change that are close to voting for cuts. We think any interest rate cuts in the coming months should be seen as a policy normalisation rather than a marked easing cycle.”
By the time the MPC next meet to discuss interest rates again, the UK will have had new inflation data, new jobs data and, according to polling, likely a new government.
France is also facing an imminent election, however the result there is a little more unpredictable. The right-wing National Rally currently leads most polls, however a recently formed left-wing alliance has also been making gains. This leaves the central powers, such as President Macron’s party, looking squeezed in the middle.
There is also election uncertainty in the US, where the Presidential tussle between Joe Biden and Donald Trump still seems to be in the balance. However, this didn’t stop the S&P 500 crossing the 5,500 mark on Thursday last week, before retreating slightly.
To put that figure in perspective, it only crossed the 5,000 market earlier this year, and was below 4,000 at the start of 2023.
Much of this growth continues to be driven by Artificial Intelligence (AI) – in particular Nvidia and a few other large companies that are deemed the likely winners of the AI race. This has led to some speculation the market could be in something of an AI bubble right now.
However, Thomas Trentman, Portfolio Manager at Sands Capital, says that AI could constitute a paradigm shift, and that we’re only at the start of its journey.
So far, the big winners have been the AI infrastructure providers, such as Nvidia and semiconductor manufacturers. However, he adds: “Looking forward—and again, based on what we’re deploying in the infrastructure phase… That’s a lot of exponential change. It’s hard for us to envision as humans, but that’s what unlocks all these use cases that are going to be the DoorDashes or the Ubers of the AI world.”
“And that’s really exciting. But again, they haven’t deployed that yet. They aren’t here yet. And so that’s why we’re in the infrastructure phase, and that’s why money is going to be spent on this infrastructure, in order to produce these use cases.”
Sands Capital is a fund manager for St. James’s Place.
Wealth Check
Currently, the UK stock market is an interesting opportunity for value investors to consider. Its companies are being more heavily discounted than like-for-like competitors in different global markets, such as the US. Historically, this discount has hovered between 15-25% on average, whereas it now stands at approximately 45-50%. From one perspective, you could see this as the market pricing in macroeconomic and structural headwinds for the UK; however, it may also point to a disconnect between perception and real value.
This disconnect between perception and real value offers a fertile ground for active, value-oriented fund managers. They look beyond short-term sentiment and evaluate companies based on solid data, uncovering opportunities that the market may have neglected.
Nick Purves of Redwheel says: “Neglect is good. We want neglect because it suggests there isn’t a fundamental problem with the business. When investor attitudes change, there’s the potential for a lot of these UK-listed businesses to do really well in share price terms.”
Are UK companies poised for a resurgence?
There are now signs that global companies are realising that they can buy good UK businesses for a fraction of what they’re worth. Over the past decade, the UK market has seen roughly 40 company takeovers each year.
This activity jumped significantly to 64 deals in 2023, and the pace of takeovers has accelerated again in 2024.
Another group recognising the latent potential within UK businesses are the boards of companies themselves.
Many have started buying back their own shares – a mechanism that can deliver value to shareholders. Share buybacks reduce the number of outstanding shares on the market, which may increase the value of remaining shares and earnings per share.
Over half of companies within the MSCI UK Index have bought back their shares in the last 12 months –the highest percentage of any market in the world. This is another good indicator that UK stocks may be undervalued.
Nick notes: “UK companies have woken up to the fact they’re not going to wait around for other investors to come in and drive their shares up. They’re basically going to try to realise some of that value themselves.”
Given prevailing negative perceptions of UK equities, the gap between market price and intrinsic value remains pronounced, with UK stocks trading at a significant discount. Our fund managers are positioned to find opportunities in this dislocation, identifying undervalued assets positioned for appreciation when market sentiment realigns with long-term potential. Ultimately, disciplined and patient investment strategies will continue to be essential for realising value opportunities within the UK market or elsewhere.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
Redwheel is a fund manager for St. James’s Place.
In The Picture
Recent changes to Japanese rules are challenging previous ideas around foreign companies buying Japanese companies.
The Last Word
“It’s absolutely heartbreaking. It was such a great game, we looked really strong. At the end we were dead on our feet.”
Scotland striker Lyndon Dykes speaking after a late goal from Hungary eliminated Scotland from Euro 2024.
SJP Approved 24/06/2024