A supportive backdrop for UK stocks

Since its launch in June 2022, JUKE has offered exposure to an extraordinary valuation opportunity in the UK market, with UK equities trading at significant discounts compared to their own history and relative to their international peers. As JUKE celebrates its third birthday, there are encouraging signs that market participants are beginning to capitalise on this valuation opportunity, as evidenced by increased share buyback, and merger and acquisition (M&A) activity.

Chief executive officers (CEOs) of UK companies are buying back their own stocks at an increasing rate compared to their peers in other equity markets, demonstrating the belief they have in the investment case for their own companies. These buybacks are helping to return significant value to shareholders. When the net buyback yield is combined with the dividend yield, the UK market’s total yield is currently one of its most attractive features compared to other markets around the world. 

UK CEOs are not alone in taking advantage of these historically wide valuation discounts in the UK market. Since last year, the marked rise in M&A activity, along with private equity buyouts, underscores the potential that private markets see in UK companies. At the same time, previous episodes of UK outperformance against developed market peers have notably occurred following a period of stretched valuations within specific sectors, and after a corresponding period of geopolitical uncertainty and interest rate volatility. All of which may sound familiar to investors today.

Catalysts for a UK market re-rating

While conversations around the valuation opportunity in the UK market and its previous outperformance are not new, we believe the UK’s attractive discount compared to its global peers offers a strategic advantage, especially as market sentiment shifts towards diversification away from the US. With the prevailing market narrative focused on the decline of US exceptionalism, the UK's closer ties with Europe could potentially attract increased foreign direct investment and enhance business relationships from major economies seeking opportunities outside the US.

Recent landmark trade agreements with the US, European Union and India, for example, underscore the UK government's commitment to minimising trade barriers in order to boost foreign trade and stimulate domestic economic growth. The current government is also supported by parliamentary stability, helping it to focus on boosting growth by expanding investments through targeted fiscal and regulatory measures. These efforts include incentivising pension funds to increase their allocation to domestic assets, and encouraging greater retail participation in equity investing as a way to stimulate the economy and ensure more people have sufficient savings in retirement. Both initiatives should help to support UK equities.

Despite broader macro concerns, the UK economy has proved resilient with GDP growth supported by declining interest rates, real wage growth and significant consumer savings. More recently, market sentiment has improved after first-quarter GDP beat expectations, and as the UK inflation rate has broadly trended downwards, remaining well below recent peaks. In response to easing inflationary pressures, the Bank of England (BOE) has implemented four rate cuts, reducing interest rates from 5.25% to 4.25%. Lower interest rates decrease borrowing costs, encouraging both spending and investment, which should bolster consumer confidence and drive economic growth.

Another key attribute enhancing the appeal of the UK market is its ability to provide better diversified sector and regional revenue exposures relative to other major global markets, with the ability of UK companies to generate revenues across geographies helping to reduce unassumed macro risks.

Overall, we believe that JUKE’s low cost, active investment approach is well placed to capitalise, as the resilient economic backdrop gives investors renewed confidence to invest in UK equities and support a re-rating of the UK equity market.