4 May 2000 - 4 May 2023
Source: Bloomberg as at 4 May 2023
We have seen ongoing mergers and acquisitions taking place as international trade buyers, private equity and venture capitalists have continued to acquire UK assets. We believe this trend will continue through 2024.
The banking sector has recently been in the spotlight amidst turmoil in the US banking sector tied to the collapse of Silicon Valley Bank, amongst others. However, the UK banking industry is structured very differently from that of the United States—the latter being composed of several thousand regional banks subjected to relatively ‘light-touch’ regulation.
That said, we believe the US banking crisis will likely lead to more regulatory scrutiny and tighter lending standards in both countries. We are mindful that any regulatory intervention or political pressure to change the banks’ actions could undermine the positive macro factors that have arisen this year.
In the past 15 years or so, with interest rates near zero, it was difficult for banks to make any meaningful net interest margin between deposit rates and lending rates—the backbone of industry profits. Against such a backdrop, it is unsurprising that banks’ share prices flatlined and were not compelling investment opportunities from our point of view. If, as seems likely, we are at the beginning of a higher interest-rate environment, the prospects for the industry have changed. This has led us to cautiously reconsider the dividend-paying attractions of some of the names in this space.
Focusing on opportunities
Based on all of the above mentioned reasons, we believe that now is a good time to maintain and even add exposure to UK equities. In the current environment, we will continue to take a consistent approach to investing and remain focused on valuation.
We prefer the stocks of high-quality, dividend-paying UK companies that we believe can provide resilient and growing income streams. In our analysis, UK equities offer an attractive yield premium versus other developed markets.
Lastly, we believe UK companies—which derive a large portion of their revenues from overseas—are well-positioned to benefit from an eventual turnaround in the global economy.
Find out more about our reasons to believe in UK equities
Ben Russon, CFA
Lead Portfolio Manager & Research Analyst
Martin Currie UK Equity
1 Source: Berenberg, “Signs for Optimism,” 12 July 2022.
2 Sources: Datastream, JPMorgan, Bloomberg Finance L.P. as of 5 September 2022. There is no assurance that any estimate, forecast or projection will be realized. Indices are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
