REALM Investment Insights: UK Large Caps
Realm Investment Management
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Given the UK is the ‘home’ market for many of our clients, it is a key investment area for our portfolios. It currently faces several economic challenges – low or potentially negative growth, high inflation and rising interest rates.
With this in mind, we believe now is the time to focus our UK allocation towards the large-cap end of the market capitalisation spectrum, which enjoys greater exposure to global markets and overseas revenues (according to FTSE Russell, over 80% of FTSE 100 earnings are sourced outside the UK1).
Despite the FTSE 100 hitting an all-time high in early February, we continue to see value in UK companies versus their US peers. The average price/earnings ratio – a useful metric for measuring a company’s value – is currently around 14 for FTSE All Share companies versus over 19 for S&P 500 companies, although this measure is slightly distorted by the presence of more expensive growth stocks in the US index.
We also see a similar pattern when we look at individual sectors. For example, mining stocks in the UK not only have a lower valuation than their US counterparts, they also tend to offer a much higher dividend.
To reflect our views, we have selected a UK Large Cap strategy for our portfolios that applies a high conviction, concentrated approach to stock selection that is not beholden to benchmark weightings. The management team uses macroeconomic and thematic research to identify key trends, along with the usual economic and investment cycles, to inform their investment decisions. This approach ensures the portfolio benefits from structural trends that can persist for long periods of time.