UK stocks have been unloved for some time, compared with the tech-heavy US markets. But could things be turning around for these out-of-favour investments?
The FTSE 100 (^FTSE) is up 8% year-to-date, bolstered partly by a more stable political backdrop, as the Labour party won July's general election with a landslide victory.
And yet it still lags behind the US S&P 500 (^GSPC), which has risen 17% year-to-date. Over five years that difference in performance becomes even starker, with the tech-focused Nasdaq Composite (^IXIC) up 126%, while S&P 500 has gained 95% in that time and the Dow Jones Industrial Average (^DJI) has risen 59%.
This far outstrips a near 18% gain on the FTSE 100 over the last five years, with the Brexit vote having already dampened sentiment towards UK stocks, in addition to the economic and market fallout from the Covid-19 pandemic.
The US indices also hold some of the world's most valuable companies, with Microsoft (MSFT) at a market capitalisation of $3.07tn (£2.32tn), which is larger than the market value of the entire FTSE 100 at £2.06tn, according to the London Stock Exchange website.
However, tech stocks led recent sell-offs in US markets, as fears around an economic slowdown and concerns that the US Federal Reserve may have been behind the curve on cutting interest rates led to sharp falls in indices. Markets plunged globally, with Japan's benchmark Nikkei 225 (^N225) experiencing its worst-ever daily selloff, eclipsing the point fall seen the day after "Black Monday" in 1987.
Unlike US indices, the FTSE 100 has low exposure to tech stocks and has lately emerged as too cheap to ignore and had a much steadier, even if dull, path and stock brokers and wealth managers are starting to note.
Jason Hollands, managing director at Bestinvest by Evelyn Partners, told Yahoo Finance UK that valuations of UK shares remain cheaper and dividend payouts are also attractive.
"High levels of share buybacks by UK listed companies and buoyant mergers and acquisitions (M&A) are two other reasons why the UK market has a bit of spring in its step," he said.
Hollands added that while UK markets had less exposure to tech companies it "does have strength in areas like financials, energy, commodities, and industrials."
So who have been the FTSE 100's winners and losers so far this year?
The engineering company delivered strong first-half results earlier in August, reporting an underlying operating profit of £1.1bn ($1.46bn). As a result, it raised its full-year guidance for underlying operating profit to between £2.1bn and £2.3bn.
Susannah Streeter, head of money and markets at Hargreaves Lansdown (HL.L), said: "Tufan Erginbilgic was pulling no punches when he took over as CEO early last year, describing the company as being ‘a burning platform’ but under his leadership, it’s risen from the flames."
Restructuring in the company has helped improve productivity, while disposing of certain businesses and assets has "lightened the load of recent financial scars and lowered its debt", she said.
Pent up demand for travel has been another tailwind for Rolls-Royce, given a large proportion of its revenue comes from servicing engines for larger long-haul planes.
"Its position in the aerospace and defence industry is enviable, particularly given the high barriers to entry, which means there are very few smaller competitors edging in on its space," Streeter said.
Looking forward, she said that Rolls-Royce's multi-billion-pound order book gives it a "good deal of visibility over future revenue."
Richard Hunter, head of markets at Interactive Investor, said: "The strength and stability of the balance sheet enabled an increase to the dividend, which gives a projected yield of 5.1%, with every likelihood of more hikes to come."
NatWest announced it completed a £1.2bn share buyback programme in May. "Subject to a continuation of the most recent trends, a fresh announcement could quite conceivably follow over the coming months," according to Hunter. By repurchasing its shares, a company can reduce the supply of them on the market which can boost share prices.
NatWest also reported a capital cushion, which acts a financial buffer for banks, of 13.6% — slightly higher than the first quarter.
In addition, NatWest reported its impairment charge had decreased to £48m, which refers to the process of writing down assets that are no longer as valuable. The bank said levels of customer defaults remained low and stable.
The election of the Labour party broadly boosted housebuilding stocks, with Vistry coming out as a winner, as its shares have climbed 47% year-to-date.
Streeter said: "Its pivot to a partnership model, where it works with developers to build homes often in the public sector for long-term investors, looks set to benefit from the policies of the new government, which has vowed to reduce planning red tape and speed up homebuilding programmes."
The housebuilder's sales rate in the first half of 2024 rose to 1.21 units per site per week, up from 0.86 units for the same period last year. Vistry also said it expects its adjusted operating profit to be around 10% higher for the first half of 2024 at approximately £227m versus the previous year.
However, Streeter cautioned that partnerships "tend to be lower-margin than ordinary housebuilding projects, so margins may remain under pressure this year — but increasing its scale in the partnerships space looks set to continue boosting future volumes, which should go a long way to offsetting the margin decline's effect on overall profits.
"And the increased size of the business has given it the bargaining power to renegotiate more favourable prices with key suppliers."
A takeover bid by US private equity firm Thoma Bravo prompted a rally in the shares of British cybersecurity firm Darktrace, seeing it re-enter the FTSE 100, with the stock up 58% year-to-date.
The sale of the company looks set to move forward despite the tragic death of its founding investor Mike Lynch after his yacht sank off the coast of Sicily earlier in August, Fortune reported. His business partner Stephen Chamberlain also died after being hit by a car while running out in Cambridgeshire on the Saturday before the sinking of the Bayesian yacht.
As Thoma Bravo’s is expected to be completed by the end of the year, Hunter said the cybersecurity firm is “likely to have a short stint” in the FTSE 100.
A buyout deal for DS Smith has helped drive the packaging firm's shares higher, with the stock up 55% year-to-date.
International Paper (IP), which is listed on the New York stock exchange, agreed to buy DS Smith for a £5.8bn share capital value. The US rival said it will also seek a secondary listing of its shares on the London stock exchange upon completion of the merger.
Streeter said that the deal offers “a lot of scope to drive efficiency gains, from integrating plants and sharing technology to using the new combined scale to push for better terms with raw material suppliers.”
However, the deal is still subject to certain regulatory clearances and conditions but the companies expect it to become effective in the fourth quarter.
Insurance firm Beazley's shares are up 43% year-to-date.
Beazley has been an “early mover into cyber risk” as part of its focus on underwriting business in specialist lines, according to Holland.
Shares rallied in February after the insurer announced that in addition to an ordinary dividend for 2023, shareholders would receive a further $300m in returned capital.
The stock continued to climb after Beazley’s 2023 fiscal year results, released in March, showed the insurer had delivered a record profit before tax of $1.25bn (£945m). Shares then jumped to an all-time high when Beazley reported its profit before tax for the first half of 2024 had nearly doubled to $728.9m.
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Losers
Models walk the runway during the Burberry catwalk show at London Fashion Week 2024. ·Xinhua News Agency via Getty Images
Hunter said: “The company has had a horrendous year and is currently a certainty to be relegated from the FTSE100 at the upcoming reshuffle in September.”
The company brought forward its first-quarter trading update, with chair Gerry Murphy saying that weakness it had highlighted coming into its 2025 fiscal year had deepened and that it expected to report an operating loss for the first half, if this trend persisted. The business suspended its dividend payments for 2025.
At this time, Joshua Schulman was appointed as fashion house's CEO and executive director, replacing Jonathan Akeroyd who stepped down and left the company “with immediate effect.”
“The level of the group’s appeal has been thwarted by weakening consumer demand, especially in the likes of China, with sales in the Asia-Pacific region declining by 23% in the first quarter,” said Hunter.
Shares of gambling giant Entain are down 35% year-to-date.
The group’s joint venture with MGM Resorts International in the US, BetMGM, reported a loss of $123m before interest, tax, depreciation and amortisation for the first half of the year and expected to report a similar loss for the second half.
Streeter said: “This had dented sentiment, as it’s taking longer than expected to reach profitability in what is a crucial growth area for the group.”
“It was having to spend heavily on marketing to gain a foothold and hold of the competition in this relatively immature but potentially huge market for online betting and gaming.”
Streeter said that the group was also facing regulatory headwinds, with affordability checks in the UK, as well as new regulations in the German market, which “are expected to continue to weigh on performance.”
However, Entain’s first-half results and slightly improved guidance for the full-year figures, “provided investors with some relief,” according to Streeter.
At the beginning of August, Entain reported earnings before interest, tax, depreciation and amortisation (EBITDA) of £524m for the first half of the year, up 5% on the same period last year and said it expected the group’s full-year figure to range between £1.04bn and £1.09bn.
Shares in Spirax Group, a provider of solutions for industrial processes including steam systems, have fallen 30% year-to-date.
The company’s group chief executive Nimesh Patel said its first-half results came in “slightly below expectations”, with revenues impacted by a weak macroeconomic environment in some of its key markets.
However, Patel said the company expected stronger growth in the second half of the year.
Streeter said: “It’s had to deal with a raft of operational challenges in a weaker global industrial production market, with the slowdowns in both China and the US weighing on performance.”
Prudential shares have been languishing at around 12-year lows, with the stock down 26% year-to-date.
In results released on Wednesday, the insurer posted a 1% dip in new business profits to $1.4bn for the first six months of the year on an annual equivalent rate basis.
A fall in annualised premium equivalent (APE) sales, as a measure of new business written in insurance, drove a 3% decline in new business profits in Hong Kong. Meanwhile, an 18% fall in APE sales in China resulted in a 33% decrease in new business profits in China.
However, Prudential reported a pick up in sales momentum in June, which it saw continuing into the second half of the year.
The company still expected new business profits for 2024 to grow at an annual rate consistent with the level needed to meet its 2022 to 2027 growth target.
Hunter said that the reason for the dip in new business profits was “mainly due to extremely strong comparatives, given that this time last year China released its pandemic restrictions and opened its economy once more."
Hospitality business Whitbread, which owns the UK’s largest hotel chain Premier Inn, has seen shares slump 22% year-to-date.
Whitbread said like-for-like accommodation sales were down 2% in the first quarter of this year, with weekend demand “slightly softer” for shorter notice bookings, particularly in London. The company also posted a 1% dip in food and beverage like-for-like sales in the first quarter, “with strong breakfast sales driven by high occupancy in our hotels offset by softer trading in a number of our branded restaurants”.
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In April, Whitbread said it planned to cut around 1,500 jobs from its UK workforce of 37,000. The announcement came as part of the company’s “accelerated growth plan”, which included intentions to convert 112 lower-returning branded restaurants into hotel rooms and exit 126 lower-returning restaurants. Whitbread said it also planned to add more than 3,500 hotel rooms, with the aim of reaching at least 97,000 open rooms in the UK by the end of its 2029 fiscal year.
Streeter said: “While the timing of bank holidays impacted on the first half, things are expected to pick up as the year goes on.”
Funds and Investment Trusts
For those investors who still want exposure to UK stocks but prefer to do so in a more diversified way, here are some funds and trusts that have performed well so far this year.
Funds and trusts can be good options for investors who still want exposure to UK stocks but prefer to do so in a more diversified way. ·Stephen Chung
Artemis UK Select
Bestinvest’s Hollands said that the Artemis UK Select fund, managed by Ed Legget and Ambrose Faulks, “hunts for growth companies that can be bought at attractive valuations.”
The fund is up nearly 19% so far this year as of Monday, according to data provided by Bestinvest using the Lipper fund research database. That compares to an 11% rise in the MSCI United Kingdom All Cap index.
“It has a flexible remit, able to roam across the UK market though it typically invests in large and mid-cap names,” said Hollands.
He pointed out that financials are currently a big theme in the fund, representing 37% of its exposure, with banks Barclays (BARC.L), NatWest and Standard Chartered (STAN.L) in its top 10 holdings, along with private equity firm 3i Group (III.L). Vistry and DS Smith are also among its top 10 positions.
Artemis Income
Joseph Hill, senior investment analyst at Hargreaves Lansdown, highlighted the Artemis Income fund which has risen by 12.4% in value so far this year, versus an 11% increase in the FTSE All Share (^FTAS), according to data provided by Hargreaves Lansdown running to 16 August.
“The fund invests in companies that they think can pay a sustainable income through the market cycle, whatever the economic backdrop,” he said, explaining that these tend to be businesses with a lot of recurring revenues.
“This increases the chance they can retain and grow their customer base, profits, and therefore dividends over time, although nothing is guaranteed,” he added.
Hill said that Hargreaves Lansdown’s analysis indicates that retailers Tesco (TSCO.L) and Next (NXT.L) have been key contributors to performance this year.
Fidelity Special Situations
Fidelity Special Situations' focus on "unloved companies differentiates the fund from some peers", said Hill. It is invested in large, medium-sized and higher-risk smaller companies that can often be overlooked by other investors.
"Maybe they've missed a profit target, or the management team made some unpopular decisions. Either way, [manager Alex Wright] must believe the company is on the road to recovery. As the company improves, its share price should rise as other investors begin to recognise the change," Hill said.
Looking across to investment trusts, Hollands highlighted Fidelity Special Values Plc, also managed by Wright and Winton, which is up 17% year-to-date.
Top 10 holdings in both the fund and trust include tobacco company Imperial Brands (IMB.L) and financial services firm Aviva (AV.L).
Hollands also noted that the trust's own shares are "trading at a -6% discount to the net asset value of the portfolio".
Exposure to banks, which have been considered "unfashionable", has served the managers of Temple Bar Investment Trust well over the last year as shares in the sector have rallied, according to Hollands. The trust counts Barclays and NatWest among its top holdings.
The trust's shares have risen 14% year-to-date.
"Over three-quarters of the portfolio is invested in UK listed companies, but the managers also have the flexibility to allocate a portion of the portfolio to overseas companies that meet their criteria," said Hollands.
Edinburgh Investment Trust, up 12%, has outperformed the FTSE All Share so far this year.
Hill said that manager Imran Sattar's "remains on owning businesses where growth is aided by structural growth tailwinds, or where there’s a change in industry structure or company strategy which will enable future profit growth".
Top holdings in the trust include oil major Shell (SHEL.L) and consumer goods company Unilever (ULVR.L).
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