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When you realise Apple is worth the same as the UK’s All-Shares index

The British share market shows why it’s important to look past the headlines and see the world objectively, says Pendal’s Clive Beagles.

IT’S easy to forget that newspaper headlines are designed to do only one thing: sell newspapers.

If long-term investors needed a reminder of the importance of looking past the headlines, consider the UK, says Pendal’s Clive Beagles.

Recent commentary on the UK has focused on political instability, energy market disruption and the prospect of a real GDP recession in 2023.

Yet UK shares are the best-performing developed market in the world this year — and still offer strong value, healthy dividends and the prospect of growth, says Beagles, a senior fund manager at Pendal’s UK-based asset manager J O Hambro.

Consider this: the FTSE All-Share Index — a measure of the biggest 600 companies on the London Stock Exchange — trades at about the same market cap as Apple.

“It’s crackers,” says Beagles. “One is a two product company — the other is an extraordinarily diverse index in all sorts of industries.

“And yet which one have investors got more money in?”

It’s a reminder of the importance of looking through the noise in investment markets and trying to see the world objectively, he says.

UK issues milder than they appear

Many of the perceived problems facing the UK are milder than they appear, says Beagles.

The recent chaos in political leadership is likely to settle down to an era of more predictable politics, with the extremes of both sides reined in by the shambles of three Prime Ministers in two months.

“In any case, we have left the EU so we might as well try and make the best of it — many of the government’s policies about accelerating deregulation were exactly what we need to do.”

The energy crisis triggered by the Russia Ukraine war is dissipating as European governments co-operate to find alternative gas suppliers and build stockpiles.

“And obviously we can’t rely on the weather, but it’s 19° here this weekend in the middle of November. Each week that goes by like that means accumulated gas reserves are being built up for the winter.”

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Look to nominal GDP

Even the prospect of recession in 2023 is not as simple as it appears, says Beagles.

“There’s far too much focus on real GDP as opposed to nominal GDP.

“Yes, we are likely to have a real GDP recession, but it could easily be in a situation where nominal GDP is still growing by 4 or 5 per cent.

“Real GDP is an artificial construct. It doesn’t exist in the real world. Companies don’t operate in a real GDP world – their revenues and profits are denominated in nominal terms.

“Many analysts are looking at previous recessions and assuming some sort of 20 to 30 per cent earnings fall for the more cyclical parts of the market.

“But in nominal terms, revenues may well be flat or rising.

“Ultimately, equities should give you an inflation hedge.”

Misery ‘slightly overdone’

Beagles says many of the key indicators of Britain’s economic health have also settled down.

Bond yields in the UK are now lower than they were before the political instability. Sterling is trading at a similar price versus the euro to what it was five years ago.

Households have some £230 billion of accumulated savings, which will offset the effect of interest rate rises and cost of living issues.

Shares also look good value, even with the FTSE100 outperforming other developed markets and trading relatively unchanged year to date.

“The dividend yield in our fund for this year is 6 per cent. It’s only ever been higher than that very briefly during the financial crisis,” says Beagles.

“Dividend cover is the highest it’s ever been and many of the stocks in our fund are on free cash flow yields in the mid-teens or above which means there’s quite a buffer against earnings disappointments.

“It feels a bit like the misery is slightly overdone.”

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at November 16, 2022. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections contained in this article are predictive and should not be relied upon when making an investment decision or recommendation. While we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.

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