Could 2024 be a golden year for UK equities?
It’s been a long time coming, but as we start the new year, I can already see many reasons why 2024
could be a golden year for UK Equities, as the UK finally gets its mojo back.
As you might expect my UK Recovery and UK Alpha funds are well positioned for this Golden Year:
overweight value, recovery, beneficiaries of lower interest rates and smaller companies and all the
other stock picking opportunities highlighted below.
My 15 reasons why UK Equities will perform.
1. Distressed Valuation
Starting valuations are extremely low, both in absolute (10.5x Price Earnings) and relative terms (half
what you pay for US equities) and with a yield (3.9%) that is again higher than government bond
yields (10yr).
2. Inflation falling
Inflation has peaked and is falling faster than expectations.
3. Interest rates falling
Interest rates will be cut in 2024.
4. Mortgage rates falling
Mortgage rates have already been falling and will continue to do so.
5. Consumer confidence picks-up
Wage inflation is falling but lags other inflation allowing for consumers to feel better off.
6. Tax cuts
Taxes have started to be cut, this will become more aggressive in the spring budget.
7. Political feelgood
There is likely to be a change of Government, which will stimulate a feel good factor. If the
Conservatives cling on then Rishi Sunak will have a strong mandate to deliver an administration that
fits his core competence, running this country effectively.
8. Economic Growth
All the above means that the UK economy will be growing robustly as we move into the second half
of 2024.
9. Policy Support
The lack of institutional investment support for UK equities has become a political issue, a worry that
minimal allocations to our UK listed stock market alongside very low valuations is undermining the
efficient workings of UK capital markets. Expect policy support here to become more explicit.
10. Breadth of stock picking opportunities
A key under-pinning for a Golden Year for UK Equities is the sheer breadth of the stock picking
opportunity set, from traditional deep value stocks such as banks, to classic recovery shares such as
housebuilders, to bond proxies such as Real Estate and Infrastructure, to unloved China plays, to de-
rated structural growers such as digital platform stocks, to lowly valued asset gatherers, to bargain
basement consumer facing stocks such as airlines, to cheap commodity producers, and then there
are the Investment Trusts (big discounts to NAV still available) and last but not least smaller
companies, a multitude of de-rated opportunities all available to corporate predators until the
market values them more correctly. The bigger the opportunity set the bigger the likely medium
term returns.
11. Timing
Timing is improving for nearly all the stock picking opportunities that we track i.e. things are getting
a bit better at a stock level, earnings may have stopped being downgraded, investor sentiment is
bottoming out, all this reflected in share prices that have started to rally. This is the perfect recipe,
rock bottom valuations AND improving timing.
12. Profits
The corporate profits and cash flow outlook will improve as we go through the year. Whilst
corporates are having to work hard to maintain profits against the background of a weaker
economy, they do now have more flexibility on costs and this should enable margins to improve as
we go through 2024, and into 2025 as revenue starts to grow again. Cash flow has remained robust
and share buy backs, often at very discounted valuations continue at pace.
13. Catch-up
The great thing is that UK equities, unlike say US equities are giving investors plenty of time to get on
board. UK small companies are up a bit over 10% from the low point, this compares with some long
duration Gilts that are up 30% (i.e. UKT 0.5% 2061) over the same time period. Meanwhile most US
large cap stocks are back at all-time highs, with pretty full valuations, much of the recovery cycle has
arguably played out in the most liquid parts of the US market. In the UK this has yet to come.
14. Flows will turn, in an illiquid market
Outflows from UK Equities, smaller companies in particular have continued at record levels for over
two years now. The resulting forced selling has artificially depressed share prices. Money has flowed
into cash because short term yields are high and into low cost global equity products, because that’s
where returns have been best over the last few years. However, yields on cash are falling now and
US equities have already rallied so the relative attractiveness of UK equities is improving. And as the
marginal seller becomes a marginal buyer the positive impact on illiquid UK equities, such as smaller
companies will be material.
15. Animal Spirits
We are all going to get bored with the unremitting negativity towards the UK. We are the world’s
sixth largest economy and are very good at lots of things. As things get better and UK equities start
to perform the narrative will improve. A combination of rock bottom valuations and things getting
better will catalyse a Golden Year for UK Equities.