I’m hard-pressed thinking of what chancellor Jeremy Hunt could have said on Wednesday that would have made me cut short a mountain bike ride in the South Downs in order to ring my stockbroker.
Indeed, save for the introduction of pension tax limits in 2006, I struggle to remember any British government decision that affected my finances at all — although new plastic notes are a lifesaver when your wet kids demand money for ice creams at the beach.
Income tax rates have more or less stayed the same since I began working. Sales taxes dropped a bit to 15 per cent in 2009 and then jumped to 20 per cent two years later. But I was single in New York at the time.
My colleague, Janan Ganesh, recently argued that policy incrementalism is under-appreciated. Maybe. But man, it’s dull. I was one of the few investors cheering Liz Truss a year and a half ago — as I am for Argentina’s mutton chops-in-chief Javier Milei today.
The former UK prime minister’s tax-cutting budget would have been the biggest since I was born. Sure, bond traders squealed like babies, but they are hardly models of consistency. Not a peep when a similar figure was spent on a pandemic test and trace programme that didn’t work.
Boring, boring, then. However, it is precisely because nothing much ever happens domestically — and even if it did it wouldn’t matter — that I have such a large overweighting to UK stocks, as you can see in the table below.
Only a quarter of FTSE 100 revenues are “Made in Britain”, according to FTSE Russell data. Nor do local interest rates affect valuations, as I’ve written before. Likewise, there is no correlation between corporate tax rates and shareholder returns.
But, best of all, my fund is protected from harm by its low valuation. It’s hard to fall down when you’re already on your bottom. While equities the world over have been star-jumping for the past year, UK shares are flat.
The Footsie is therefore cheap versus a decade ago on all kinds of measures. A forward price-earnings multiple of 10 times is a third lower. Multiples of cash flow are 60 per cent less. Exclude capital expenditures and the market is 40 per cent better value than it was, relative to its combined equity and debt.
What focusing on these ratios sometime hides, though, are movements in their numerators and denominators. In addition, people with an interest in selling you stocks often ignore valuation metrics telling a different story.
Relative to total sales, for example, the FTSE 100 is no more attractive now than 10 years ago. Nor compared with the book value of all its constituents. Meanwhile, today’s dividend yield of 4 per cent is exactly where it was when Russia held the Winter Olympics in 2014 and then promptly annexed Crimea.
Seems weird, right? Not invading a neighbour after watching the bobsleigh — I sympathise. Rather that some UK valuation measures have fallen precipitously, while others haven’t. Which ratios are the ones to follow, then?
Looking at their component parts in aggregate can enlighten us. To begin with we know that FTSE 100 companies today make about half a trillion more pounds in earnings before interest, tax, depreciation and amortisation than they did a decade ago. So, alongside an index that is barely up a tenth, profitability-based ratios are going to look sweet.
In fact, operating margins in aggregate have doubled to about 16 per cent over the period. Stagnant real wage growth has helped, as have lower interest costs and input prices due to subdued inflation (thank you Asian savers and to China joining the World Trade Organization).
That 1.6mn fewer people are employed by FTSE 100 companies now than in 2014 also buoys returns. Businesses are less risky, too — elevated margins have more or less halved debt servicing ratios — which should also mean lower valuation multiples.
On the other hand, large UK stocks have been woeful at growing their top line — total sales are actually lower today than 10 years ago. And a lack of investment in fixed assets has meant the book value per share of the market is also less (which flatters returns on assets, of course).
But what sometimes screws the head the most about the FTSE 100 stems from how much value is paid out in the form of dividends. Including these, the total return for the index is 65 per cent over the past 10 years. Price appreciation is only 12 per cent.
So when you wonder why the capitalisation of the UK market has barely moved since 2014, that’s the reason. For comparison, payouts (which include buybacks) only account for 20 per cent of total returns for the S&P 500.
It is fine, therefore, to compare today’s price/earnings ratio with history because the numerator doesn’t include dividends nor do retained profits from year to year in the denominator. Comparing the index level with the likes of revenues, however, risks flattery.
Still, on balance there are more green lights than red. Versus earnings or cash flows in particular, the FTSE 100 index is flashing go. Sure, there are two banks in the top 20 but I want more exposure to resources. Shell, BP, Rio Tinto and Glencore provide this.
So my overweight remains despite a long run of abysmal performance (even Asian stocks have done almost twice as well over a decade in sterling terms). The FTSE 100 is not even up since January — quite an achievement.
People say the UK deserves a discount because it is in a post-Brexit funk. But I don’t believe the country is more dysfunctional than other developed markets that trade at much higher valuations.
I felt a similar optimism about cheap Japanese stocks five years ago. Just have to keep going for long rides and stay patient.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
