Whether you’re looking to invest in tomorrow’s UK market leaders or a UK dividend hero, J.P.Morgan Asset Management has a range of UK equity investment trusts to suit your needs.
Is it time to consider the UK stock market? Three of J.P. Morgan Asset Management’s portfolio managers think so. Between them, William Meadon, Guy Anderson and Georgina Brittain manage the four JPMorgan investment trusts specialising in UK stocks. They argue that for reliable dividend income, combined with the inherent value in the out-of-favour UK market, and the bottom-up stock picking that J.P.Morgan Asset Management is known for, these are the trusts that should be on investors’ radar.
Identifying the best investment opportunities in the UK
UK equity investors have needed considerable resilience over the recent past. The war in Ukraine, political turbulence and a lack of FTSE-listed technology stocks have been compounded in the past year and more by rocketing inflation, widespread strikes and wobbles in the banking sector to leave the UK market deeply and painfully unloved.
However, for the three UK equity fund managers taking part in J.P. Morgan Asset Management’s recent equities round table, the investment clouds hanging over the market now have pretty lustrous silver linings.
Of course, the forecast is still extremely changeable. As Will Meadon, portfolio manager of JPM Claverhouse investment trust (JCH), points out, inflation remains a top concern for investment managers globally, with UK figures particularly troubling.
Alone of all the G7 countries, UK inflation sits stubbornly in double digits, and the Bank of England has revised its year-end forecast up from 2.5% to 5%; market consensus is nearer 6.6%.
While falling energy prices and a higher 12-month inflation base rate should help to improve the numbers in coming months, wage increases and other structural issues mean the BoE is walking a fine line as it tries to control inflation without over-dampening economic growth. “There are more interest rate rises to come,” warns Meadon.
Against that, Guy Anderson, manager of the mid-cap focused JPM Mercantile investment trust (MRC), points out that the UK came through “peak fear” in autumn 2022, when the BoE forecast seven consecutive quarters of recession; it now anticipates no recession at all.
“We’re experiencing a significant macroeconomic upgrade cycle,” he says. “There are undoubtedly challenges, led by inflation, but the UK economy has proved far more robust than expected.”
In addition, real wage growth later this year is an increasing possibility as inflation slows; that would benefit consumers, in turn helping to drive economic growth. “There’s cause for cautious optimism against an incredibly pessimistic backdrop,” adds Anderson.
Value in the UK stock market
But it’s valuations that fundamentally underpin that optimism. As Meadon observes: “Relative to overseas markets, UK large cap valuations are at generational lows, at 1970s levels. 1 The average price/earnings ratio is less than 10x, with average yields of 4.3% and rising.” 2
Moreover, these are world-class, global businesses. At some point, he says, the market will recognise the huge anomalies that currently mean these stocks trade at a 30% or 40% discount to their international peer groups. 3
“The catalyst for that release of value could be various things: government action, M&A activity, share buybacks. It doesn’t really matter what it is; the main thing is to have confidence that these anomalies will close at some stage.”
Mid and small cap stocks are in much the same position. says Anderson, with mid-caps trading on a small premium to blue-chips at around 11x forward earnings.4 “The really interesting thing is that because of the macroeconomic upgrade that has been going on, those forecast earnings have been pretty resilient, which should help underline the value available from the UK market,” he adds.
Georgina Brittain, who manages JPMorgan MidCap (JMF) and JPMorgan UK Smaller Companies (JMI), makes the point that while they can be more volatile, small companies have the potential to grow despite a difficult economic backdrop.
“The key thing for us is to find the winners, because in this climate the weak will get weaker and the strong will become stronger – so this is very much a stock-picker’s market,” she says. “That plays to our natural strengths here, as we’re all bottom-up investors.”
Importantly, although small company investors tend to have a natural growth bias, in this exceptionally cheap market it’s still quite possible to find great value.
“The high-conviction JMI portfolio is on approximately 10x p/e; four of the top 10 are trading below 10x earnings, and two are on less than 5x,” she says.5 “But the crucial metric for us is free cash flow yield (which compares free cash flow against market value), and that currently stands at over 7% - which just shouts value.” 6
Quality growth stocks in the UK stock market
So why could JMI be an attractive route into the undervalued UK market? For Brittain, the key point – in addition to an outstanding track record and a highly disciplined investment process – is value.
“The UK market is relatively cheap, small caps are cheap and the trust is on a significant discount, so that’s value on value on value – a triple whammy,” she says.
One prime example of the extent of that value for quality small cap stocks is Bank of Georgia, which operates as one of the leading banks in a rapidly growing economy with strong regulation. “It has metrics to kill for and it’s yielding 8.5%, but we can buy it on a p/e of less than 5x,”7 Brittain says.
For Meadon, the biggest attractions specific to JCH at present are simple. It’s a pure UK play in the UK Growth and Income sector, so no relatively pricey overseas stocks are diluting that exposure, and it has a 50 year record of dividend growth, with a prospective strong yield. Better still, he adds, shares are trading below par: “This is a rare opportunity to buy a cheap market at a discount.”
He picks out 3i as a particular highlight within the portfolio. The private equity success story has just reported stellar results and yet trades on a discount rather than its long-term double digit premium.
Anderson highlights the long-term strengths of the FTSE 250 as “one of the strongest asset classes of the past 25 years” for long-term capital growth, and the fact that MRC provides a very liquid route into a somewhat less liquid area of the market.
Retailer Dunelm is his stand-out stock choice. “The future is within its control: 85% of growth over the last 5 years has been driven by market share gains, and it continues to take market share and we see a huge amount of future growth.” 8
As Meadon emphasises, market efficiency means it’s only a matter of time until well-positioned UK investors are rewarded.
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Summary Risk Indicator
The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.
Past performance is not a guide to current and future performance.
Source: J.P. Morgan Asset Management/Morningstar as at 05/05/2023. Net asset value performance data has been calculated on a NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP.
Investment objective: Aims to achieve capital growth through investing in a diversified portfolio of UK medium and smaller companies. It pays quarterly dividends and aims to grow its dividend at least in line with inflation. The Company’s gearing policy is to operate within a range of 10% net cash to 20% geared.
Key Risks: External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions. This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down. This Company may also invest in smaller companies which may increase its risk profile. The share price may trade at a discount to the Net Asset Value of the Company. The single market in which the Company primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies. Companies listed on AIM tend to be smaller and early stage companies and may carry greater risks than an investment in a Company with a full listing on the London Stock Exchange.
1 Source: J.P. Morgan Asset Management using data from MSCI, I/B/E/S, Morgan Stanley Research. Based on PE (Price to Earnings),PBV (Price to Book Value) and PD (Price to Dividend). Average relative valuations use 12 month forward data where available. Data from 31 December 1974 to 31 December 2022.
2 Bloomberg, 6 June 2023
3 Bloomberg, 6 June 2023
4 Bloomberg, 6 June 2023
5 Factset 5 June 2023
6 Source: J. P. Morgan Asset Management, 5 June 2023
7 Bloomberg, 6 June 2023
8 Dunelm 2022 Annual Report & Accounts, https://corporate.dunelm.com/media/3244/dunelm-2022-strategic-report.pdf
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