For financial professionals in the UK

UK shares coming out of the cold?

Job Curtis, ASIP

Job Curtis, ASIP

Portfolio Manager

9 Dec 2021

Dragging us lower

Source: Bloomberg, 31/05/2016 – 30/11/2021

Then, Covid-19 descended and added to Britain’s woes. The UK would end up one of the worst affected economies, with demand hit by repeated rounds of strict lockdowns. Although strong fiscal and monetary policy were unleashed to contain the crisis, by the end of 2020, the economy had shrunk by nearly 10% year-on-year (the largest annual fall on record).3 For UK income investors, the outcome was certainly painful, with the UK market exposed to sectors badly affected by the pandemic. Profits and dividends were cut, with financials and oil & gas the worst affected sectors.

A positive response

All said, markets fluctuate, and the unwinding of several headwinds has turned around the UK’s fortunes. To begin with, Brexit uncertainty has been markedly reduced, after a deal was reached between the EU and the UK on Christmas Eve 2020 – a few days shy of the deadline. Suddenly, the trading environment for businesses is a lot clearer than it was a few years ago.

Source: Bank of England, as at 21st Nov 2021

Perhaps most importantly of all, however: the NHS has masterfully handled the vaccine roll-out, enabling Britain to get ahead of most developed economies, and re-open quickly. As a result, widespread bankruptcies have been avoided, household savings are the second highest they have been on record, demand has returned strongly, and the economy has sprung back into action. Meaning the UK economy is set for one of the strongest years since 1973, with the Office for Budget Responsibility (OBR) forecasting GDP growth of 6.5% for 2021.7 In addition, Britain’s stock markets are looking alluring from several different viewpoints.

A turnaround indeed

First, UK shares look the cheapest they’ve been in decades. When looking at the price of UK shares relative to forward earnings and compared to global indices, an enormous valuation gap emerges – UK shares are trading at around a 40%8 discount to global shares (as highlighted in the chart below). This is quite remarkable given they were on par just prior to the Brexit vote in 2016.

Source: JPMorgan, as at 1st Nov 2021

Second, dividends have largely recovered.  In the UK, total dividends are up 88.6%year-on-year to September 2021; and even if adjusted for things like currency movements and special dividends, they’re still up 59.9%.9 With balance sheets looking much healthier, and profits on the mend, the outlook for dividends looks encouraging.

In particular, there has been extraordinary growth in mining dividends off the back of soaring commodity prices and record-breaking profits. BHP – the world’s biggest dividend payer in 2021 – and Rio Tinto both sit on London’s exchanges. Banks, the other big Covid loser, have also rebounded strongly as regulatory restrictions on dividends have been lifted.9 It means the UK market’s dividend yield is now the highest of all regions globally, and far above rates on gilts or bank deposits.

Third, the weak currency offers a boost for UK firms, as many operate in global markets and derive a substantial portion of their revenues from overseas. 77% of FTSE-100 company revenues come from abroad, for example, and for the FTSE-250 it’s 58%.10 Analysts think the pound’s weakness is likely to continue into next year.

Promising market environment

This environment is particularly desirable for The City of London Investment Trust – a £1.75bn investment trust – managed by Job Curtis. The Trust aims to provide investors with long-term growth in income and capital, principally by investing in shares of UK companies, with a bias towards larger stocks on the FTSE 100. It is a mandate in which the Trust has delivered successfully, paying out 55 consecutive years of growing income to its investors. This unbroken record is one of the longest in the world, and why the industry body for investment trusts – the association of investment companies (AIC) – labels it as one of their ‘dividend heroes’.

The investment trust structure has also been crucial in ensuring that investors receive a stable and reliable income, due to its revenue reserve feature. This feature allows the manager to reserve surplus income during the good years and pay out in the leaner years, thereby smoothing the level of payments during periods when dividends are less plentiful; last year being case in point.

Performance has been understandably weak in the years following the Brexit vote and when the pandemic hit. However, it has shown a marked improvement since news of successful vaccine trials emerged a year ago, when economically sensitive stocks – of which the London market is heavily exposed to – rallied strongly as investors bet on a global economic recovery. Moreover, given cheap UK valuations, Job is finding a host of reasonably priced, strong dividend paying companies in which to invest. These include companies in the consumer staples sector, for example Diageo, Unilever, and British American Tobacco, which offer strong global growth prospects, especially in emerging markets; within the financials sector, where he believes the prospects for earnings and dividend growth are undervalued; and in food retailers such as Tesco, which offer strong cash flow generation and are looking cheap relative to history.

Exciting prospects ahead

As compelling as the UK seems, one must be cognisant of headwinds that pose a risk to markets and the global economy. The war on Covid rages on, as the emergence of the recent Omicron variant vividly proves – threatening the spectre of further lockdowns. Resource bottlenecks and labour shortages are also hobbling the economic recovery somewhat as supply chains struggle to meet resurging demand. Alongside soaring energy costs, it’s putting pressure on prices and wages, sending inflation sharply upwards. The OBR thinks the consumer price index measure of inflation could reach just shy of 5% next year, which would be the highest rate in three decades. It means the Bank of England may need to raise interest rates soon to cool inflation, and the government may need to tighten fiscal policy too, which could put the brakes on markets. That said, anxiety over the new variant means these decisions will likely be put on hold until next year.

Nonetheless, with valuations at decade-long lows, dividends largely recovering and set to be strong, and the weakness in the pound providing a tailwind for many UK companies, the opportunities in UK Plc and for the City of London Investment Trust are certainly looking encouraging.

Emerging market Expand

Countries that are transitioning away from being a low income, less developed economy to one that is more integrated with the global economy and is making progress in areas such as depth and access to bond and equity markets and development of modern financial and regulatory institutions.

Fiscal policy Expand

Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.

Forward price-to-earnings (forward P/E) Expand

Forward price-to-earnings (forward P/E) is a version of the ratio of price-to-earnings (P/E) that uses forecasted earnings for the P/E calculation. While the earnings used in this formula are just an estimate and not as reliable as current or historical earnings data, there are still benefits to estimated P/E analysis.

Gilts Expand

British government bonds sold by the Bank of England, done to finance the British national debt.

Gross Domestic Product Expand

The value of all finished goods and services produced by a country, within a specific time period (usually quarterly or annually). It is usually expressed as a percentage comparison to a previous time period and is a broad measure of a country’s overall economic activity.

Inflation Expand

The rate at which the prices of goods and services are rising in an economy. The CPI and RPI are two common measures.

Monetary policy Expand

The policies of a central bank aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money.

Quantitative easing Expand

An unconventional monetary policy used by central banks to stimulate the economy by boosting the amount of overall money in the banking system.

Valuations Expand

Metrics used to gauge a company’s performance, financial health, and expectations for future earnings eg, price to earnings (P/E) ratio and return on equity (ROE).

Yield Expand

The level of income on a security, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.

  1. Source: KPMG: UK private equity activity soars – KPMG United Kingdom (
  2. Source: Bloomberg, 31/05/2016 – 30/11/20211
  3. Source: Office for National Statistics, as at 12 February 2021
  4. Source: Janus Henderson Global Dividend Index – Edition 29, February 2021
  5. Source: LinkGroup, UK Dividend Monitor Q4, 2020
  6. Source: J.P. Morgan, as at 1st Nov 2021
  7. Source: Bank of England, as at 21st Nov 2021
  8. Source: Bloomberg, U.K. Economy Set to Grow 6.5% in 2021, Best Since 1973, Chancellor Says – Bloomberg There is no guarantee that past trends will continue, or forecasts will be realised
  9. Source: Janus Henderson Global Dividend Index – Edition 32, November 2021
  10. Source: Vanguard, The case for FTSE 250 exposure, as at 28 June 2021

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.


Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.


The information in this article does not qualify as an investment recommendation.


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