The state of the Union

VT Tyndall Global Select Fund

The state of the Union

A lot has changed in the past seven years since the UK parted ways with their European partners, and since that time UK equities have languished as investors placed them in the ‘too difficult’ bucket. However, like the proverbial London Bus, having waited for some news to turn the tide of sentiment, two significant events have happened in quick succession.

The departure of Nicola Sturgeon from her role as First Minister of Scotland, took a sledgehammer to the independence movement north of the border. Calls, and support, for devolution and then independence have risen in the past 20 years, mainly due the efforts of Alex Salmond and Nicola Sturgeon, but without such vociferous leaders, the SNP looks rudderless and on the brink of open warfare. It appears, that out of the blue, the probability of a fracture in the United Kingdom has significantly reduced and thus any discount applied to equity markets on that account should start to reduce.

Almost simultaneously, Rishi Sunak, made strides towards not only mending relationships with European leaders, but also with making headway in resolving post-Brexit arrangements over the Irish Border issue that has left the Stormont Assembly paralysed for over a year. Although we await the details, and the devil may still lurk there, the odds on ‘Windsor framework’ being ratified have risen; any progress is welcomed given the prickly nature of the issue and should be welcomed by UK investors.

Not only is there cause for optimism due to the agreement but also the likely reduction in red tape, paperwork, and costs that have been so burdensome for UK companies seeking to export goods in the past few years. It has been many years since we have seen Ursula von der Leyen break into a smile whilst dealing with UK politicians so a thawing in the frost nature of the relationship with the UK’s largest trading partner can only be good for UK companies and investors.

Away from politics there are many reasons for investors to look once again at UK equities, which despite the performance over the past two months, remain close to all-time lows relative to the wider global market despite some world leading companies being listed on the UK exchange.

One such reason is that for income investors the UK remains one of the highest yielding markets worldwide, as highlighted by the red and blue lines below. at close to 4% versus the global index that yields less than 2.5% or the S&P500 that yields 1.75%, there is a clear advantage to holding a weighting in the UK (and Australia which has almost consistently posted the largest dividend yield!). When the world is concerned about inflation and a possible recession, dividend returns should rise up the importance scale for investors, and thus it is likely that companies with consistently high dividend are likely to outperform.

Given the discount to global equity markets one would expect that the UK economy is languishing behind its western peers, but this is not the case, the most recent reading showed that the UK is ahead of both the US and Europe, helped by a very strong recovery by the services sector.

If Rishi Sunak had to stand in front of the nation and give a state of the Union address, there are more reasons that he would have to increase investor optimism than when he took office following the Truss/ Kwarteng debacle. While it will by no means be plain sailing, investors would be wise to look again at UK equities and not leave them in the too hard bucket, as they may well find that in a few years they will have missed a golden opportunity.

10th March 2023
Read time : 5  mins

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Data source (unless otherwise stated): Bloomberg
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