Insights

Less bezzle, more sparkle in the UK!

In 2021, investing in UK equities began to feel a little less lonely. The FTSE 100 index rose by more than 10%1 for the year by early December and UK companies resumed dividend payments after the pandemic-induced economic freeze in early 2020 when all hope seemed extinguished.
Indeed, since the market’s March 2020 lows the FTSE 100 has returned more than 40%. But that is nothing compared to the runaway train that is the US S&P 500 Index, which has more than doubled in that time.2
In fact, despite an excellent year, the UK remains relatively unloved. Investors pulled £8 billion from UK equity funds in the first 10 months of 2021, from a total of £235 billion.3 This means there have been outflows for five out of six years since the 2016 Brexit referendum. One hedge fund called the UK the “Jurassic Park of stock exchanges” with investors not interested in growth and only hanging around for the robust dividend payments.4
The absence of tech shares goes some way to explain this, as the US tech giants have totally dominated global markets since 2018 (Figure 1). But strip out the big six tech stocks – Alphabet, Apple, Amazon, Facebook, Netflix and Microsoft – and S&P returns suddenly look a lot like everywhere else, while the Nasdaq without its five tech giants is deeply negative year-to-date.5

Figure 1: Apple’s market cap outstrips the entire FTSE 100

Apple's market capitalization exceeds that of the entire FTSE 100

Source: Refinitive Datastream, December 2021

Beware the bezzle

This has also been a time of what economist JK Galbraith termed the “bezzle” in the 1920s: an as-yet-unrevealed inventory of nasty shocks built up in the good times, which only reveal themselves when tougher times arrive. A whole generation is learning to trade crypto currencies and NFTs (non-fungible tokens) rather than stocks, and when they are dipping their toes into markets it’s via “meme stocks” popular among retail investors shared on social media platforms.
When tougher times arrive, this crowded capital could be exposed to bezzle assets that quickly plummet. Central bank backstops have conditioned investors to buy on the dip, but in fact have made the whole system more fragile. A shock such as the Omicron Covid-19 variant partially circumventing vaccines could be such a catalyst to send equities into a ferocious nosedive.

Back in business

The UK, meanwhile, is quietly going about its business. The volatility of the post-Brexit deal seems to have settled, JP Morgan recently turned bullish on UK equities for the first time since the referendum,6 and in the summer Bloomberg was hailing “the City’s IPO renaissance” as new listings during the first six months of 2021 rose by 467% with a valuation of $20 billion. All the while the UK retains its valuation arbitrage and remains cheap: M&A is at record levels, helped by the GBP which is at 35-year lows versus the dollar, and there have been 12 transactions above $500 million in the UK market in 2021 so far – the most since 2007 – with the average transaction value now at $2.6 billion, almost an alltime high. This has seen $10 billion in premia paid by the private equity community to public equity to close the valuation arbitrage – a record level – with deals such as that for Morrisons supermarket.7
According to JP Morgan’s chief markets strategist, the majority of equity investors today don’t buy or sell shares based on stock specific fundamentals.8 But we do. The UK market is much more nuanced than people suppose – it’s a stock picker’s market – and we have the team for this. We know there are good companies out there because we engage with them. This is crucial to our process and is something we take seriously.
This rising number of passive investors, and trading-orientated managers, means we have a meaningful say in the way companies are run. So we actively engage to probe the reasons behind performance, and we have a say in stewardship and governance. We’re not afraid to vote against issues, but are confident in our process and happy to explain our rationale.

Looking ahead

While the UK has rallied a long way, it remains a reliable alternative to more highly valued, crowded markets and has further to go. The market is more nuanced than simply buying banks and commodities. Our fundamental research process uncovers hidden gems, with an eye for unloved stocks that have disappointed but remain good businesses. Meanwhile, our active engagement probes what is behind performance. We will be pragmatic and patient as the recovering UK delivers on its promise.
20 December 2021
Richard Colwell
Richard Colwell
Head of UK Equities
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Less bezzle, more sparkle in the UK!

1 Bloomberg, December 2021.
2 Bloomberg, December 2021.
3 Morningstar data, November 2021.
4 Daily Telegraph, London’s stock market still punched above its weight, 3 December 2021.
5 S&P Global Market Intelligence, 6 December 2021.
6 Daily Telegraph, London’s stock market still punched above its weight, 3 December 2021.
7 JP Morgan Conference, November 2021.
8 https://www.cnbc.com/2017/06/13/death-of-the-human-investor-just-10-percent-of-trading-is-regular-stock-picking-jpmorgan-estimates.html

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors.
Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial
services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number:
201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities
(CE:AQA779). Registered in Hong Kong under the ce (Chapter 622), No. 1173058.

In the UK: issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In the Middle East: this document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). This document is intended to provide distributors with information about Group products and services and is not for further
distribution. The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors.
Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial
services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number:
201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities
(CE:AQA779). Registered in Hong Kong under the ce (Chapter 622), No. 1173058.

In the UK: issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In the Middle East: this document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). This document is intended to provide distributors with information about Group products and services and is not for further
distribution. The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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