The Unexpected Winners in the UK

In the current fast changing world, many investors look at new developments for profitable investments. Everyone is familiar with the rise of cryptocurrencies and internet-based companies. Many of these companies created impressive returns, yet also many have failed. Therefore, this is a high risk, high reward investment. Certain industries, like supermarkets and fashion retailers have lost the interest of investors and many believe these industries are dying.

Growth stocks typically have low profit compared to the share price and have low dividend pay-out ratios.

Fast growing stocks with a high potential are classified as growth stocks. Growth stocks typically have low profit compared to the share price and have low dividend pay-out ratios. Investors buy these stocks because they believe the companies will generate much more profit in the future. On the other hand, the “dying” industries are known as value stocks. These have high and steady profit compared to the share price and have high dividend pay-out ratios. Investors buy these stocks as they are less volatile and generate a steady cash flow.

Supermarket chains J Sainsbury and Tesco are two of the seven best performing stocks with returns of 30% and 24.4%, respectively.

Currently, something interesting is happening in the UK. The stock with the highest return in 2017 were the value stocks. Supermarket chains J Sainsbury and Tesco are two of the seven best performing stocks with returns of 30% and 24.4%, respectively. Furthermore, fashion retailer Next Plc is up almost 40%. Many investors thought these stocks would be harmed badly by the rise of online competition. Hedge funds even took on large short position on these kind of stocks. This resulted in a drop of the stock prices of these companies several years back.

As these companies coped better with the threat than expected, the stock prices climbed slowly. This resulted in that hedge funds had to cover their short positions by going long in the stock. The drove up the price even further. By now most short positions on the value stocks have been pulled back.

The dividend pay-out ratio in the UK is among the highest in developed markets.

The value stocks performed better than expected in the UK. However, based on a survey among fund managers, the UK is still the least popular destination for global investors. There are worries regarding the Brexit and weak domestic economy. On the other hand, the dividend pay-out ratio in the UK is among the highest in developed markets. This could be to increase the demand for stocks or because there are little growth opportunities left. The UK stock market responds strongly to any new about the agreement the UK and EU will make after the Brexit.

As illustrated by the high returns of value stocks in the UK after they were thought to be dying, this might be the moment to take a long position in the UK market. There are already some fund managers that are doing so, for example Oldfield Partners. There are known to buy products that are disliked by other investors, like Russian oil and Japanese banks. Mr Waller of Oldfield Partners mentions: “The UK market is currently discounting a lot of noise. We are bottom-up stockpickers, and there are whole swaths of the UK market now screening as cheap”. Yet, there is likely to be uncertainty regarding the UK in the foreseeable future.

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