Franklin Templeton Thoughts: UK equities – shifting to a more positive narrative

UK equities have fallen out of fashion in recent years—not helped by a slew of negative headlines. However, Martin Currie’s Ben Russon believes it is time to change the narrative to a more positive one, and shares the reasons for his optimism.

Key takeaways:

  • Despite negative headlines surrounding the UK economy, it is showing signs of resilience as consumers continue to draw down on excess savings and the job market remains healthy.
  • UK companies show strong balance sheets and their stocks offer compelling valuations.
  • UK equities are attractive to many international investors as the British pound remains historically low.
  • We prefer stocks of high-quality, dividend-paying UK companies that we believe can provide resilient and growing income streams.

UK economy exhibits resilience

Global economies, and indeed equity markets, began to struggle last year as rising inflation and interest rates led to worries about recessions and market volatility. In the United Kingdom, consumer confidence and retail sales fell precipitously in the autumn of 2022.

This was around the same time that the short-lived Liz Truss administration introduced its disastrous mini-budget that caused chaotic movements in UK asset prices. Although the negative sentiment towards UK assets and its currency reached its nadir in September-October, there continue to be a lot of negative media headlines about the UK economy, stock market and political backdrop. Many international investors remain reluctant to consider UK assets.

In our view, when the market sentiment became very bearish in late 2022, we found a number of opportunities. We believe that if investors hold the line and keep positions in UK stocks and sectors that are tied to the domestic economy, consumer confidence and retail spending, then there are value opportunities as conditions improve.

Additionally, even though the outlook for 2023-2024 remains challenging, the outturn for the UK economy is defying the gloomier predictions and is proving more resilient than first feared. As a consequence, UK stock prices have been recovering and the British pound has improved as well. The movement of the UK’s currency is a good gauge of sentiment towards the country.

The principal reason that the economy is performing better than expectations relates to the ongoing strength of the labour market, with unemployment at historic lows, while at the same time job vacancies remain elevated as employers struggle to fill vacancies.

Another factor to consider relates to the excess savings built up during the pandemic, providing a spending cushion and helping households manage their way through a higher inflation environment.

UK equities remain attractive

In our analysis, there are several reasons why UK stocks are attractive. First, corporate balance sheets largely appear to be in good health, despite the uncertain economic outlook. This has not always been the case during periods of economic weakness.

Looking across market sectors, aside from financials stocks, corporate debt is at very manageable levels. This means that corporations are in a good position to absorb rising finance costs—as interest rates increase—without upsetting their financial metrics. In our opinion, it would seem there would be little need for distressed rights issues or emergency equity raises, activities that we might have seen in previous economic downturns.

Second is that the UK equity market looks attractive to us on an historical basis with a price-to-earnings (P/E) ratio of around 11x. In our analysis, the valuation of the UK equity market also looks more attractive versus its international peers, with the MSCI UK Index 12-month forward P/E at the bottom of its historic range relative to that of the MSCI World Index.

Third, while the British pound has gone a long way from moving towards parity with the US dollar as market commentators talked about last year, it is still at the bottom of its historic range. This situation reinforces the attractiveness of UK assets to international buyers, in addition to the aforementioned attractive valuations.

We have seen ongoing mergers and acquisitions taking place as international trade buyers, private equity and venture capitalists have continued to acquire UK assets. We believe this trend will continue through 2024.

The banking sector has recently been in the spotlight amidst turmoil in the US banking sector tied to the collapse of Silicon Valley Bank, amongst others. However, the UK banking industry is structured very differently from that of the United States—the latter being composed of several thousand regional banks subjected to relatively ‘light-touch’ regulation.

That said, we believe the US banking crisis will likely lead to more regulatory scrutiny and tighter lending standards in both countries, which will likely affect credit creation and ultimately impact economic growth. We are mindful that any regulatory intervention or political pressure to change the banks’ actions could undermine the positive macro factors that have arisen this year.

In the past 15 years or so, with interest rates near zero, it was difficult for banks to make any meaningful net interest margin between deposit rates and lending rates—the backbone of industry profits. Against such a backdrop, it is unsurprising that banks’ share prices flatlined and were not compelling investment opportunities from our point of view. If, as seems likely, we are at the beginning of a higher interest-rate environment, the prospects for the industry have changed. This has led us to cautiously reconsider the dividend-paying attractions of some of the names in this space.

Focusing on opportunities

Based on all of the abovementioned reasons, we believe that now is a good time to maintain and even add exposure to UK equities. In the current environment, we will continue to take a consistent approach to investing and remain focused on valuation.

We prefer the stocks of high-quality, dividend-paying UK companies that we believe can provide resilient and growing income streams. In our analysis, UK equities offer an attractive yield premium versus other developed markets.

Lastly, we believe UK companies—which derive a large portion of their revenues from overseas—are well-positioned to benefit from an eventual turnaround in the global economy.


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What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.

Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.

Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Smaller and newer companies can be particularly sensitive to changing economic conditions. Their growth prospects are less certain than those of larger, more established companies, and they can be volatile.

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MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.

MeDirect launches Swift Home Loans Guarantee

Customers who apply for a home loan from MeDirect before 30 September 2023 will be given a €1,000 reward if they do not get a decision on their application within 15 days. This guarantee of a swift home loan response applies on all MeDirect’s retail mortgage products including Home Loans, Green Home Loans, Property Investment Loans and Home Equity Loans. At the same time, MeDirect will be rewarding customers who are able to sign the deed of a property purchase in less than 100 calendar days from the date of issuance of the facility letter with a €1,000 monetary benefit.

Larissa Ciantar, Senior Manager – Mortgage Lending at MeDirect Malta, said, “In recent years MeDirect has established a reputation for its fast and efficient market leading service when it comes to issuing home loans quotes and sanction letters. We’re now backing this up with the Swift Home Loans Guarantee.  As Malta’s first digital bank, we’ve combined technology with the expertise of our team to be able to give customers a better experience and a decision faster than any other bank in Malta. We’re prepared to pay €1,000 to customers if we don’t deliver on our promise.”

In addition to providing this guarantee of a quick decision on home loan applications, MeDirect’s is also giving a €1,000 reward to customers who sign the property purchase deed in less than 100 days from the date when the facility letter is issued. This is designed to incentivise the conclusion of promise of sale agreements into actual purchases, a process which can also be long and frustrating for home buyers. “While MeDirect cannot directly affect the legal processes between buyer and seller, we hope this incentive will help to encourage all concerned to conclude proceedings efficiently.” added Ciantar.  

More information on MeDirect’s guarantee on home loans is available at

MeDirect Bank (Malta) plc is regulated by the Malta Financial Services Authority as a Credit Institution under the Banking Act 1994. Applications are subject to the Bank’s lending criteria. Offer is for a limited time only. Terms and conditions apply and are available on request.


MeDirect jintroduċi Swift Home Loans Guarantee

Il-klijenti li japplikaw għal home loan ma’ MeDirect qabel it-30 ta’ Settembru 2023 se jingħataw €1,000 jekk il-bank ma jieħux deċiżjoni dwar l-applikazzjoni tagħhom fi żmien 15-il jum. Din il-garanzija ta’ deċiżjoni fil-pront dwar home loans tapplika fuq il-prodotti ta’ self kollha ta’ MeDirect. Dawn jinkludu Home Loans, Green Home Loans, Property Investment Loans u Home Equity Loans. Apparti minn hekk, MeDirect se jkun qed jagħti €1,000 lill-klijenti li jiffirmaw l-kuntratt ta’ xiri ta’ proprjetà f’inqas minn 100 jum mid-data tal-ħruġ tas-sanction letter.

Larissa Ciantar, Senior Manager – Mortgage Lending ta’ MeDirect Malta, qalet, “F’dawn l-aħħar snin MeDirect stabbilixxa reputazzjoni għas-servizz veloċi u effiċjenti tiegħhu li jwassal biex joħroġ kwotazzjonijiet tal-home loans kif ukoll is-sanction letter b’mod aktar mgħaġġel minn kif kienet in-norma fuq is-suq. Issa qed noffru wkoll garanzija ta’ dan. Bħala l-ewwel bank diġitali ta’ Malta, għaqqadna t-teknoloġija mal-kompetenza tat-tim tagħna biex inkunu nistgħu nagħtu esperjenza aħjar lill-klijenti u deċiżjonijiet aktar malajr minn kwalunkwe bank ieħor f’Malta. Aħna se nagħtu €1,000 lill-klijenti jekk ma nwettqux il-wegħda tagħna.”

Minbarra li jipprovdi din il-garanzija ta’ deċiżjoni fil-pront dwar l-applikazzjonijiet għal home loan, MeDirect qed jagħti wkoll premju ta’ €1,000 lill-klijenti li jiffirmaw l-kuntratt tax-xiri tal-proprjetà f’inqas minn 100 jum mid-data ta’ meta tkun ħarġet is-sanction letter. Dan huwa maħsub biex jinċentiva l-konverzjoni tal-konvenju f’xiri attwali, proċess li jista’ wkoll ikun twil u frustranti għal xerrejja tal-propjeta’. “Filwaqt li MeDirect ma jistax jaffettwa direttament il-proċessi legali bejn ix-xerrej u l-bejjiegħ, nittamaw li dan l-inċentiv jgħin biex jinkoraġġixxi lil dawk kollha kkonċernati biex jikkonkludu l-proċedimenti b’mod effiċjenti.” żiedet Ciantar.

Aktar informazzjoni dwar il-MeDirect Swift Home Loans Guarantee tinsab fuq

MeDirect Bank (Malta) plc huwa regolat mill-Awtorità għas-Servizzi Finanzjarji ta’ Malta bħala Istituzzjoni ta’ Kreditu taħt l-Att Bankarju tal-1994. L-applikazzjonijiet huma suġġetti għall-kriterji ta’ self tal-Bank. L-offerta hija għal żmien limitat biss. Termini u kundizzjonijiet japplikaw u huma disponibbli u jistgħu jinkisbu fuq talba tal-klijent.


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