What we can learn as UK opens up and outperforms

What can we learn as UK stocks outperform their global peers? We asked Pendal Group’s CLIVE BEAGLES

• Post-Covid — and five years after Brexit vote — UK market is outperforming
• British economy is growing fast as economy re-opens
• Australia’s re-opening is three-to-six months behind

FEDERAL treasurer Josh Frydenberg told Sydney radio this week that the United Kingdom’s approach to re-opening was “really instructive” for Australia.

Despite a high infection rate, the British economy is growing fast and its stockmarket is out-performing its global peers.

“They’re still getting 30,000-plus cases each day, but their rate of hospitalisation has fallen by 83 per cent since the peak at the start of the year,” Frydenberg told 2GB.

“As you know, they’re not turning back — they’re living with the virus and so should we here in Australia.”

UK data supports his view.

Last week the UK’s Office for National Statistics upgraded economic growth for the June quarter from 4.8 per cent to 5.5 per cent. The International Monetary Fund and the OECD expect the UK economy to expand at a 7 per cent clip this year, and around 5 per cent next year.

The FTSE100 gained around 1 per cent over the past month while other major indices in the United States, Japan, Germany and Australia were lower.

Five years after Britain voted to leave the European Union, the threat of a post-Brexit slowdown now appears to have well and truly passed.

“Whatever the reason, the conditions are right for the UK market to outperform,” says Clive Beagles, a senior fund manager at Pendal Group’s UK-based asset manager J O Hambro Capital Management.

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What can Australian investors learn from the UK?

If Frydenberg is right, what can Australian investors glean from the UK’s re-opening experience?

“The fact that the UK is fully opened up now shows where Australia will go in three to six months,” says Sydney-based Pendal portfolio manager Tim Hext.

We’ll face similar issues such as demand outstripping supply and tighter labour — and we have similar stockmarket themes such as higher exposure to commodities and lower exposure to technology.

In the UK, “employment is the main driver of growth at the moment … the labour market is incredibly tight”, Beagles says.

Labour supply issues supply should be a shorter-term issue in Australia as borders re-open, says Hext. The UK faces a more structural challenge on that front, reckons Hext.

Beagles says “the UK is more openly talking about raising interest rates … and bond yields have gone from 75 basis points to 120.

“While there’s a short-term focus on the cost-of-living crisis because of energy prices, there’s also this huge pool of savings ready to be unleashed.”

Stockmarket themes

The UK’s economic pick-up underpins the stronger outlook for the FTSE. But several other factors that have worked against the UK market in recent years are now supporting shares.

The FTSE 100 has a heavy weighting to oil and gas and energy companies, including BP, Glencore, Anglo American and Royal Dutch Shell.

These have been less loved as support for environmental, social and governance (ESG) issues has grown. But as energy prices soar, hitting multi-year records, UK investors are again shifting into the oil and gas and coal companies, Beagles says.

The FTSE 100 gets around two-thirds of its earnings from outside the UK market, so it also depends on the global economy. But when the local economy gains momentum, sentiment for the bourse improves.   

“The UK market also has a bias towards value stocks (there are relatively few technology stocks) and financials,” Beagles says.

“These can benefit from higher rates. And there’s a weighting towards commodities. Mining and oil companies tend to do well when rates are rising as inflation hedge.”

Combined it means UK equities are an attractive place to invest, he says.

“The day in the sun for the UK market might finally be coming after five years in the doghouse since the Brexit referendum.”

Australian investors will be hoping for similar as we re-open and learn to live with the virus.

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