As the UK heads for its first non-lockdown Christmas in two years, Simon Gergel and Richard Knight go through their festive wish list
Heading into Christmas, the concerns of portfolio managers and parents are once again aligned: Is last year’s craze still popular? Did we not already buy one of those? And of course, what is the price?
Boys and girls who unwrapped holdings in the FTSE All Share last year, are now sitting on around 14% returns. Sadly, Santa does always seem to be more generous with some children than others. While the UK stock market has only just surpassed its pre-Covid level, the S&P500 did so last August, with its stocking now worth 26% more than it was last December 25.
As always though, the best way of making sure you get what you want is to buy it yourself. This festive season, the UK market offers a range of bargains with long-term appeal for canny stock pickers. Despite mounting concern about the latest Omicron variant of Covid-19, vaccination programs, emerging treatments and higher levels of natural immunity mean we are in a very different situation to a year ago.
The most attractive UK companies have strong earnings potential their shares yet look cheap relative to their peers outside of the UK, but also relative to their own history. The current average forward P/E ratio for the FTSE All Share is 13x, compared to 22x for the S&P 500 – a level last seen in 2001.
Partly, this is due to the make-up of the UK market. The US has far more growth-oriented technology, whereas the UK skews more towards legacy cyclical sectors like energy and mining. Yet, UK stocks have been at a further discount for some time.
Since 2016, the possibilities of a highly dysfunctional Brexit, Corbyn government, and poorly handled pandemic, have hung over the equity market like successive grey clouds.. But the UK economy is not the UK stock market. The number of London-listed multinationals mean that around 70% of the All Share’s earnings come from overseas. The skies are now clearing, thanks to a more centrist opposition, an early vaccination campaign and a smoother than expected departure from the European Union.
The UK government also looks committed to ensuring this festive period will be our first outside of lockdown in two years. With some UK-listed cyclical stocks already benefitting from a global economic reopening, Christmas 2021 presents an unrivalled opportunity to indulge in excessive consumption closer to home. Such occasions often showcase key trends, many of which will subsist as both the UK and other economies continue adapting to post-pandemic life.
After 18 months inside, many of us are making up for lost time with friends and will likely continue to do so until mandated otherwise. Pubs, entertainment venues and transport providers are all expecting a massive jump in Q4 revenues compared to the previous year. Having seen their share prices rocket last November on the news of a vaccine, names like Fullers, National Express and Ten Entertainment remain relatively depressed a year later despite the scope for long-term recovery. Similarly, clothing companies like Next, which have been able to thrive online during the pandemic, might expect further gains as partygoers stock up their winter wardrobe. And, if all these festivities make for sore heads the morning after, GSK’s soon to be independently listed Consumer Health business will provide welcome relief.
At the other end of the spectrum, homemakers with disposable income have had plenty of time to prepare for winter. The pandemic house craze has already helped revitalise the share prices of DFS, Tyman and Redrow. And while we may be past the initial boom, hybrid working and a greater appreciation for domestic bliss seems to support higher spending long-term. More in-home dining means Tesco’s H1 sales were already 9% bigger than two years ago, and will likely be boosted further by larger Christmas Day gatherings. Retailers also expect more people on the sofa can be enticed into now open shops for Boxing Day sales, with the broadcaster ITV expecting 2021 advertising revenue to be 24% higher than in 2020.
Without question, there are still challenges ahead for UK companies. Supply chain issues – some of these related to Brexit – as well as rising energy costs and a tight labour market are all contributing to rising input costs. If or when higher interest rates do materialise, companies with excessive debt will see costs rise even further. And of course, a meaningful change in the pandemic could further delay economic recovery.
However, these features are manifest globally and, in the UK, more than reflected in low valuations. And regardless of geography, companies with strong value propositions will be able to pass these costs on to customers. The UK equity market has plenty of these, with the additional benefits of a steep relative global discount, a high and currently beneficial cyclical composition, as well as improving sentiment. For active managers, this Christmas may be an ideal time to put UK stocks under the tree.
Simon Gergel, CIO UK equity and Richard Knight, portfolio manager at AllianzGI
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