November has seen some of the biggest concerted price moves in my career, with the FTSE 100 up 14% since Halloween.
We have spoken recently about the UK being in a kangaroo market, dragged down by Covid-19 and geo-political risks and pulled up by vaccine hopes and QE+. Now that Pfizer has announced they have created a vaccine that is 90% effective, the market has sprung up and out of its summer holding pattern and is fast approaching 6500 points – its post-coronavirus peak back in June. Energy (+25%), Financials (+18%) and Consumer Discretionary (+22%) stocks all rallied hard on the vaccine news while in turn, the big tech stocks had some of the froth blown off them. Businesses like Trainline, Greggs, Beazley and Shaftesbury are far too good to be depressed for long in our opinion.
Vaccine news has also triggered a major change in sectoral leadership away from the growth/momentum sectors and back to ‘value’. The NASDAQ Composite Index, which has led markets for so long, now appears to be topping-out as ‘big tech’ takes a breather.
However, despite these recent moves, the UK market still shows a huge amount of value. With more positive economic data, coupled with lower rates of inflation and supported by aggressive fiscal and monetary policies, we could be set for a favourable 2021.
But what about lockdown?
Lockdown 2.0 has stitched up the travel & leisure industry and a lot of businesses look very attractively priced. Young’s, the UK pubco operating over 200 premises, is a classic Covid-effected example of a high quality business operating in an out-of-favour sector. Over the summer months, including when pubs had to close at 10pm, the company managed to record impressive like-for-like revenues of 84% versus 2019. It is well capitalised, run by a strong management team and is in a very strong position to grow, as and when the market recovers. Another quality stock that’s been left behind is Shaftesbury, the landlord behind London’s Carnaby Street, Seven Dials in Covent Garden and Chinatown. The business raised just shy of £300 million (we took part) at a 55% discount to NAV to pay off its revolving credit facility, which leaves it to be well capitalised to continue in its operations of the heart and soul of West End London’s nightlife.
If the price is right…
Even away from the consumer discretionary sector, the UK remains fundamentally cheaper and more attractive than its international peers. In healthcare, replacement hip and wound care manufacturer Smith & Nephew has been blighted by the universal postponement of elective surgeries, much like its US-listed cousin Stryker. Yet Smith & Nephew is trading on a Forward P/E of 28x versus Stryker on 32x, with the UK listed firm paying a larger dividend yield, 1.4% versus 1%. The same can be said for Unilever (21x and 3.1%) versus Nestlé (25x and 2.6%) and Diageo (26x and 2.4%) versus Pernod Ricard (29x and 1.7%).
As these international stocks have performed strongly post the March-lows, their UK competitors and peers have lagged. Now they are starting to gather momentum and catch up. Comparatively, they are cheaper but just as well capitalised, managed and generating similar levels of free cash flow.