Select Page

I’m not the world’s best singer – close friends and family will tell you that. But looking at the state of the UK equity market right now, the lyrics written by the legendary former singer/songwriter of Queen in the 1976 hit, Somebody to Love, seem wholly apposite:

 Everyday (everyday) I try and I try

But everybody wants to put me down


To say that the performance of UK equities has been disappointing year-to-date is putting it mildly – unless of course you’d managed to buy at March’s low when the FTSE 100 index fell to 6,888 and trade it all the way up to almost 8,000.  As I write, the index is down year-to-date in capital return terms by 5%, with several villainous forces afoot.  The daily political noise over Brexit is one of these, the worrying thought of a Labour opposition led by a hard-line socialist Jeremy Corbyn another, while the general economic newsflow is rather uninspiring.

Arguably the main driver of the UK equity market – profits growth – is somewhat mixed, so as ever it pays to be selective. Topping the results leader board, and propelled by an oil price in excess of US$80 a barrel, while yielding close to 6%, have been oil majors, BP and Shell[1]. Miners such as BHP Billiton and Rio have benefited from the tailwind of a stronger US dollar and a so far negligible impact from the trade tariffs,  while dependable behemoths, Unilever and Whitbread, continue to deliver solid, if unspectacular, revenue growth. By contrast housebuilders in general, as well as retailers, DFS Furniture and Card Factory, are having a torrid time – the former hit by worries over the costs of housing, the latter impacted by the increasing structural threat of online competition.

…but corporate raiders love UK equities

Yet, overall, UK assets are undeniably cheap – you’ve only got to witness the frenetic level of M&A activity taking place all year. Takeda Pharmaceutical of Japan swallowed Shire, the protracted battle for Sky finally culminated in Comcast delivering its knock-out blow in a bid to scoop up the coveted broadcasting assets. Property owner, Intu, is, once again, the subject of renewed takeover interest, having seen off a bid from rivals Hammerson earlier in the year, while Chinese buyers are once again coming in for London property assets.

london bridge
… while US equities have become a crowded trade

Overall it would appear equities are looking a tad expensive. President Trump’s fiscal largesse aside, it seems odd when short-term US Treasury notes are yielding a risk free 3%, while the riskier S&P 500 stock market index yields marginally under 2%[2]. That yield gap looks eminently more sensible in the UK as investors enjoy a 4% dividend yield on UK equities, while short-term Gilts offer a yield of only 0.5%.[3]

If at this late stage of the economic cycle dollar strength, US inflation, or rising US Treasuries combine to act as a brake on the seemingly unstoppable rise of US shares, spare a thought for those good old-fashioned unloved, asset-backed UK equities back home. At some point they must resort to mean reversion as starting valuations begin to look ludicrously cheap.

[1] Bloomberg September 30,2019

[2] Bloomberg September 30, 2019

[3] Bloomberg September 30, 2019

The information on this site is not available for private investors and is restricted to Professional Investors.

South River Asset Management Ltd is registered in England and Wales (Number 04195976). South River Asset Management Ltd is authorised and regulated by the Financial Conduct Authority in the UK, with its registered office at 1 King Street, London, EC2V 8AU. The information on this website is directed only to eligible professional investors. Please satisfy yourself that you are eligible to make such investments before accessing this information. You must read the following information before proceeding, as it enables the legal and regulatory restrictions which apply to both the information contained and investment products referred to within this website. To enter this website your browser must have cookies enabled or you will not be aware of important regulatory information. The information on this website constitutes a financial promotion and has been issued and approved by South River Asset Management Ltd for the purpose of Section 21 of the Financial Services and Markets Act 2000  and does not, in any way, constitute investment legal or taxation advice. South River Asset Management Ltd’s details are set out in the FCA register and our FRN number is 197097. You hereby agree that any dispute arising from your use of this website or the information it contains, will be subject to the exclusive jurisdiction of the English Courts. This website is confidential, and no part of it may be reproduced, distributed or transmitted without the prior written permission of South River Asset Management Ltd. Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide for the future. Returns from the structured products are at risk in the event of any of the institutions who provide securities for these products default on their financial obligations. Any decision to invest should be based on the information contained in the relevant term sheet or prospectus (and any supplements thereto) of the relevant product which includes information on certain risks associated with an investment.

This website does not disclose all the risks and other significant issues related to an investment in the securities. Prior to transacting potential investors should ensure that they fully understand the terms of the securities and any applicable risks. Neither this website nor any documents contained within it constitutes an offer or solicitation to sell in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. The material contained within is purely for information purposes and its accuracy cannot be guaranteed. By accessing this website you represent that you are permitted by the laws of your jurisdiction of residence to access this site and the information contained herein. This website is not intended for residents of the United States as we are not authorised to sell our products and services in the USA.