Ian Lance, RWC

UK valuations ‘back to the 90s’ says RWC’s Lance


Negative sentiment and a move by overseas investors to shun the UK have pushed domestic equity valuations ‘back to the 90s’, according to RWC Partner’s Ian Lance.

The manager of the TM RWC UK Equity Income fund alongside Nick Purves, Lance (pictured) says the current market conditions present a buying opportunity for investors, with the outflows seen from the UK leaving valuations well below other regions.
 
Since the start of 2016 to the end of Q1 2019, some GBP13.2 billion has been withdrawn from UK equity funds, according to data from the Investment Association.
 
This shunning of the asset class, Lance said, is throwing open huge opportunities for investors as valuations reached depressed levels not seen this millennium.
 
“The dislocations in the market today are as extreme as we have seen for several decades,” says Lance. “UK equities are deeply, deeply out of favour today and we can see that via the asset allocation to the UK which is pretty much at an all-time low.
 
“The valuation of UK equities is now standing at the biggest discount to MSCI World we have seen since the 1990s, while the gap between UK dividend yields and bond yields is as extreme as it has been since the First World War. Sterling itself is also looking pretty undervalued.”
 
Within the UK, value as a style has continued to perform poorly, with the dispersion between value equities and growth equities also at levels not seen for numerous decades. This, Lance says, is despite healthy profits within value businesses, and has been caused by heavy de-ratings.
 
“The poor performance over the last two years is entirely due to a valuation de-rating more severe than any time during the last 30 years.
 
“The companies themselves are not doing badly; instead it is sentiment that has de-rated that subset of companies, and that should be an opportunity for investors.
 
“This continued trend of de-rating of value has pushed the dispersion between value equities and growth equities out to levels we have not seen for several decades.”
 
Co-manager Purves adds: “Interestingly, the last time we were seeing scenarios like this was at the height of the Global Financial Crisis in 2009, with the differential then being between defensiveness and cyclicality. At that point in time, defensiveness was very highly valued by the market and cyclicality very lowly valued.
 
“These signals proved to be very powerful indicators and by acting upon those then, it enabled us to deliver some very good returns for investors in 2009/10.”

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