The philosophy of pessimism holds that life is not worth living and non-existence is preferable to existence. Perhaps the most fulsome exploration of this idea can be found in Arthur Schopenhauer’s The World as Will and Representation, first published in 1818.
As you might imagine, the book is far from an uproariously rib-tickling read. It is therefore tough to recommend. If you want to grasp its underlying message, it might be far easier to instead put yourself in the shoes of a UK equities manager over the past five years.
It may be an exaggeration to say this market has driven people to abject despair and a Schopenhauer-like sense of utter futility, but it is reasonable to suggest it has severely tested their powers of optimism from time to time.
The problem has not been that UK equities have failed to perform per se. Rather, it has been a widespread perception that much better opportunities are to be found elsewhere – most notably in the US and, to a lesser extent, in Europe.
There were signs that this view could finally be falling out of favour as 2024 drew to a close. In November, for the first time since October 2020, UK-focused funds collectively experienced inflows – to the tune of $779mn (£625mn) – rather than outflows. Alas, the positivity was short-lived.
So are there any grounds for a genuine turnaround in sentiment?
To begin to answer this question, we need to remind ourselves why British stocks became unloved in the first instance and then reflect on how the landscape may have changed of late.
Unrecognised appeal amid a perfect storm
UK equities’ plight is commonly traced back to Brexit. Following much tortuous wrangling, the UK’s withdrawal from the EU single market and customs union took place on December 31 2020 – two months after that miserable five-year stretch of outflows commenced.
What followed was less than helpful, to put it mildly. The Covid-19 pandemic, rising inflation, escalating costs and near-relentless political instability did little to present UK stocks in an irresistible light.
Significantly, plenty of UK companies showed commendable resilience in the face of this perfect storm. In particular, many businesses at the lower end of the market capitalisation spectrum demonstrated an impressive ability to adapt, innovate and soldier on.
Unfortunately, these efforts went largely unacknowledged by most investors, whose attention was instead inexorably drawn to the conspicuous outperformance of a few mega-cap technology titans in the US. Even historically cheap valuations could not turn the tide. So much for the wonders of diversification, you might think.
More recently, doubts surrounding the new Labour government’s first Budget dealt a fresh blow to UK equities’ collective cause. The Aim ‘junior’ market endured an especially torrid spell as speculation swirled.
The new year brought further disappointment, with rising gilt yields threatening to drive up the cost of borrowing for businesses. Yet, despite everything, it could be argued that the UK has an edge over some of its rivals – the other major economies of Europe foremost among them.
Reconsideration in the face of relative calm?
No one could sincerely say the UK is now revelling in political stability. The prime minister’s approval ratings have been in free-fall, with a survey published in November finding around two-thirds of Britons considered themselves worse off than before the general election.
Compared to France and Germany, however, Britain might in some ways be regarded as a haven of calm. Both Paris and Berlin are picking up the pieces after the ignominious collapse of their governments, meaning their respective markets are shrouded in uncertainty.
Meanwhile, the lengthy shadow of Donald Trump’s trade policies looms over mainland Europe. With a substantial presence in Mexico, the region’s automotive sector has already been unsettled by the president’s rhetoric on swingeing tariffs – and other manufacturers are likely to follow.
Whether the UK can leverage its ‘special relationship’ to strike a deal EU members could only dream of is a moot point. Yet it may be worth remembering that most British exports to the US take the form of services, not goods, as a result of which they might escape Trump’s threatened blitz.
Beyond all this, of course, UK stocks are still cheap – at least for the time being. This underscores the appeal of an investment arena whose attractions have been consistently – and often undeservedly – overlooked.
As someone who has repeatedly argued the case for UK equities during the darkest days, would I enjoy seeing other markets relegated to the sidelines if British companies were at last to regain their lustre in the wider investment community’s eyes? As Schopenhauer remarked in one of his brighter moments: “To feel envy is human. To savour schadenfreude is devilish.”
Eustace Santa Barbara is co-manager of the IFSL Marlborough Special Situations, UK Micro-Cap Growth and Nano-Cap Growth funds