The UK equity market has been undervalued for quite some time, but businesses in the country have proved themselves and high levels of valuation discounts might turn in their favour in the eyes of new investors, Matt Evans, a portfolio manager at asset management business Ninety One, said in a conference in mid-March.
Since 2011, the UK equity market has undergone a series of macroeconomic shocks – including a recession, Brexit and Covid – that have caused it to underperform. However, this trend is starting to unwind, according to Evans in his presentation ‘Finding quality and making impact in the UK’.
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“The UK market is undervalued across sectors and although that has been the case for quite a while, there is good reason to say that UK businesses have proved themselves operationally,” he explained.
“Such valuation discounts, when compared with other global markets, should put the UK in a stronger position with a broader range of investors,” he added.
Investing in talent is key for UK CEOs
Cost inflation is a top concern for UK CEOs, according to Evans. Similar to what is being experienced by companies globally, rising costs for companies have been material and across the board.
“We have seen it in raw materials, supply chains and logistics, and in labour,” said Evans. “This, however, has been quite an interesting space to watch.” He went on to explain that the attention that companies give to their workforce has been a key element in the investment decision-making of Ninety One.
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By GlobalDataEvans, who focuses on sustainable smaller companies in the UK within Ninety One’s quality team, spoke of the example of Hotel Chocolat, which gave its employees a bonus over Christmas to ensure the company would keep up with its deliveries despite supply chain and logistics disruptions.
“Hotel Chocolat manufactures [its products] in Cambridge and has had raw materials and supply chains issues,” he said. “Over Christmas, it was concerned that it wouldn’t be able to deliver to its clients due to disruption to its supply chains, so it invested heavily in its people by offering a 20% bonus to both existing and new employees [in order to retain them over this crucial period].”
While this measure was very clearly intended as a temporary fix, Hotel Chocolat made it a more permanent measure by offering a 10% wage rise to staff in February.
Interestingly, Evans added that these moves were targeted at the lower end of the wage spectrum – the people who work in factories and warehouses and are the most likely to be impacted by wider cost rises across the energy sector.
While these measures are bound to drive businesses’ labour costs up temporarily, they demonstrate, said Evans, that the company understands the importance of investing in its own workforce.
The importance of managing cost inflation
Evans acknowledged the importance of raw materials and commodities in the market, but said that the way a company manages the cost inflation around them is what matters the most to Ninety One’s sustainability and quality investing team.
“What we are looking for is those companies that really understand their responsibility to manage all stakeholders and to make the most appropriate investment into those areas,” he said.
In a world where consumers are paying increasing attention to the ESG element of the businesses they buy from, the companies who invest in their workforce’s wages and talent development are poised to become more competitive, Evans concluded.
