This article was taken from the
September 2024 issue of Market Insight. To subscribe to our investment publications, please visit
www.redmayne.co.uk/publications.
September generally marks the return of activity for financial markets with the holiday season concluded, kids back at school, and offices that bit busier. Throw in shortening daylight hours, the prospect of another wet winter, not that this summer was pure sunshine, and nostalgia over recent holidays, and things can seem somewhat gloomy. While this is a somewhat cyclical emotion, a more permanent gloom continues with respect to UK financial markets.
It’s no secret that there are continued outflows of UK equity funds, declining UK allocations for both retail and institutional investors, and a significant valuation discount of UK equities to their US peers. Despite this, our domestic market has delivered some reasonable returns for the year thus far, with the FTSE All Share Index up 11.3% at the end of August. Our topic for this edition of Market Insight focuses on the UK market, and some reasons to be optimistic.
Seen as an income-focused market, the UK can indeed be a rich hunting ground for dividend investors. The FTSE All Share Index alone offers a yield of 3.9% at the time of writing, a small premium to the 3.7% UK 10-year gilt yield. Within the index, 227 constituents, including investment companies, offer a yield above that of the index, with a number tipping into the double figures. Some of these names have significant track records of growing their dividend distributions, with the likes of Halma plc achieving 45-years of consecutive dividend growth greater than 5%. In the UK’s listed investment companies sector, 21 trusts hold the coveted Association of Investment Companies Dividend Hero status, awarded for achieving more than 20-years of consecutive dividend growth. Some hold significantly longer track records, with City of London Investment Trust achieving 58-years of consecutive dividend growth.
However, the UK isn’t just an income market, several companies are market leaders with dominant positions within their sectors, such as the online property search platform, Rightmove. Others, such as Bloomsbury Publishing, which takes the spotlight in our Stock Focus article, holds the rights to key intangible assets such as the Harry Potter book franchise, which are impossible to replicate. In the investment companies space, firms own significant amounts of healthcare properties, a vital infrastructure for our nation’s changing demographics, and wind farms, critical to the clean energy transition.
As UK equities trade cheaply to global peers, particularly the US, and to its own historical levels, seemingly the most active buyers are companies themselves. Merger and acquisition activity has been notable recently, especially in the real estate sector, and companies continue to allocate cash to buying back their own shares on perceived discounts to their intrinsic value. With such activity seemingly so widespread, the question remains as to whether those who continue to shun the UK market will be left wishing they hadn’t.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. The information and views were correct at time of writing but may have changed at point of reading.