Insights

Plus ça change...

"Investors are constantly looking for change. This is a time of remarkable and rapid technological change, of new ways of doing almost everything - and markets offer great opportunities in those fields.

But is there also money to be made in things that do not change, especially when the outcome can be better forecast, based on the history of demand for the product or service? There is no other market where the fear of change is as explicitly ‘in the price' as the UK. The double impact of Brexit and the pandemic has weighed on it heavily, as the chart below shows. You might notice the sharp dip since the middle of 2016. So, looking at that chart, why invest here?

UK equities look cheap vs. the rest of the world

Source: MSCI, IBES, Morgan Stanley Research as at 31 December 2020.

Brexit is not over by a long way: the final outcome is still unknown. But as the proverb says, a journey of a thousand miles starts with the first step. Avoiding a ‘no-deal' feels like the first few miles are over. The pantomime leading up to Christmas was overtaken by pragmatism. Many of the companies we invest in now face more red tape. But they can operate, as they always have, on the world stage. And it is always worth remembering that the UK's stock market is a window on the world: two-thirds of the earnings from the top 100 companies are earned abroad. So, Brexit has allowed us the opportunity to buy exposure to the world's markets at (much) lower prices than are available elsewhere.

The more immediate prospects for returns, however, may be domestic. The pandemic has changed many things. It has accelerated the structural change in society: online purchases, programme viewing, social interaction. Digital has been the beneficiary of people's isolation over the past year. The companies which provide these services have seen their share prices soar. Those that require the movement of people have suffered; and there have been significant casualties in physical retail, leisure and hospitality.

Yet the future here is more interesting. We doubt much has really changed in what people want to do. We have yet to meet (remotely of course) anyone who wants to spend more time at home over the coming months. We have yet to meet anyone whose list of what they want to do doesn't include travel, eating out, visiting a pub and meeting family and friends. We have no foresight as to when this pandemic will end, but when it does, we believe consumers will revert to their old habits of socialising and travelling. And of course, the number of players in these sectors has fallen – leaving more for the survivors.

The key is having the financial strength to weather the current environment. We spent most of our efforts last year identifying great businesses which we believed would be around after the pandemic and would benefit from the return to normality. We expect that as restrictions are lifted, people's hard-earned cash will move away from online to the experiences we have all missed for at least a year. There were glimpses of this last summer: when restrictions were reduced, people lined up to get into shops, pubs were full and airline bookings surged. We have been building up our holdings in all three of those areas. At some point the pandemic will be under control, and then human beings, for all the change in the world, will return to what they enjoy.

The UK stock market is now being valued like some structurally impaired business with a declining future. Given the market's exposure to global earnings, this appears illogical; and the current valuation looks inconsistent against other markets. Currently shunned by global investors, when that perception changes there could be a decent improvement in the UK's rating. Even if that is not recognised by investors, a queue of corporate and private equity buyers is already waiting.

So, we expect significant change in 2021. Perhaps the most interesting will be how quickly we all change back to our old ways as the year progresses. Plus, ça change, indeed. Mais plus c'est la même chose."

Derek Stuart
Co-Founder and Fund Manager, Artemis Investment Management LLP.
5th February 2021

Witan Investment Trust plc is an equity investment. Please note that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuation and you may not get back the amount originally invested.

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