HUB EXCLUSIVES PANEL DISCUSSION
Panel discussion, hosted by Cherry Reynard, with:
Gervais Williams, Head of Equities, Premier Miton Investors
Anna Farmbrough, Portfolio Manager, Ninety One
UK stock markets have seen a notable improvement over the last few months, galvanised by improving economic and political stability. This has brought some valuations closer to their international peers. Nevertheless, there remain notable anomalies in UK stock market valuations, ripe for active managers to exploit.
Gervais Williams, head of equities at Premier Miton Investors, points out that the larger companies in the UK market have been relatively robust and, in some cases, trade on equivalent valuations with their international peers, “but moving further down the market capitalisation range, there’s less index interest, and valuations are even more compelling.
“Once we get beyond the types of stocks that are considered by international investors – the small caps and the microcaps, for example – there has been some extraordinary underperformance. These are not companies that have announced disappointing profits. In many cases, they are highly successful. They’ve just suffered a huge share price drawdown.”
In this part of the market, he says, there are cash generative companies, paying high yields. There are obvious valuation anomalies between small and large capitalisation companies in the same sector, particularly in areas such as energy.
Valuations versus reality
Nevertheless, there are still opportunities among larger companies, says Anna Farmbrough, a portfolio Manager at Ninety One. She gives the example of Diageo, which has been hit by destocking headwinds and a weaker US consumer. However, she adds, “the market is pricing Diageo as if there is a structural headwind to premium sprits rather than a cyclical one. Diageo has a tremendously diversified portfolio.” Amid UK domestic companies, the group likes Weatherspoons, which has strong pricing power and scope to raise prices if there is another inflationary shock.
Williams says that there are companies that look unexciting on the outside, but have strong inherent growth prospects. He gives the example of PayPoint, which makes the terminals for corner shops. “It’s been expanding nicely, moving into banking and multi-pay. It’s been moving into parcel drop off and pick up. It believes it can support as many as 250m parcels through its network. It’s got a strong balance sheet. It doesn’t tend to be affected by the level of interest rates or economic growth, and it has a high yield.”
He also likes companies with physical assets, believing they are a bulwark against future rises in inflation. With that in mind, he owns a number of mining and energy companies, including Pan-African Resources, a South African company, listed in London. The company is cash generative, has a growing yield, and a low valuation. “These companies have great risk/reward ratios,” he adds.
Risky areas
However, selectivity remains important. Farmbrough says that some companies are now ‘priced for perfection’. She worries that any slight disappointment could see a dip in the share price. “There are plenty of high quality businesses with very attractive valuations. You don’t need to hold onto these higher priced businesses.”
Nevertheless, both managers are more optimistic about the UK than they have been for some time. Williams says: “The UK stock market appears to be breaking out on the upside. We’re likely to see accelerating performance from the UK, while the US stock market stagnates. My expectation is the UK market really surprises investors and is more resilient at a time when the global economy is unsettled. If we do see international investors coming in and local selling drying up, it could move quickly. Then all our holdings that have been overlooked, and are standing at poor valuations may start outperforming.” He is more upbeat that he has been for 30 years.
Farmbrough says that there are plenty of global challenges, and UK companies cannot be immune, but overall, they look robust. “We would rather invest in companies that don’t need global economic stability to do well. Companies that have pricing power that can grow in any scenario. I take comfort from the view that UK businesses are generally in great shape.”
The UK market is finally starting to revive, and for the time being, there remain plenty of opportunities for investors. There are high quality UK businesses, with domestic and international franchises trading at low valuations. It is a good moment to be a stock picker in the UK market.
