Are UK Public Markets Unfit for Your Purpose?

By Louis H-P on December 31, 2022

Public markets are oft said to be the first place for investors to start with. This is because of the transparency and the world-class companies which are listed there. Unfortunately in recent years a disturbing trend has appeared, namely the quality of publicly-listed companies is lower. This phenomenon has been around for several years, indeed it can be traced back to the introduction of quantative easing and zero percent interest rates. 

What are public markets?

Public markets are where private companies which need capital meet investors willing to invest in them. In return for giving up some control of their companies, management gets new capital to invest.

This systems works well for private companies who are looking to grow and offer attractive growth opportunities. Typically companies like this will list publicly, (usually through an IPO) as there are many investors wanting a piece of the action. The key is that they are ‘attractive’.

Public markets also provide companies which have already listed a way to raise further capital. This can be to buy another company or because they have suffered an economic setback and need to shore up the balance sheet.

Is there a problem?

For some time the companies which have been listing on the FTSE100 have been less than inspiring. Indeed, if they are listing at all! The British semi-conductor company Arm is a case in point. In 2016 when listed on the FTSE100, it was bought by Softbank who now intend to sell it by listing it publicly again. You would think back on the FTSE100, but despite UK governments efforts, it is set to be listed on the New York based NASDAQ.

Arguably the most high profile recent UK listing was Wise, the transfer payment app, which listed in 2021. Yet this has not been a success story, at the time of writing it is down -25%. Hardly compelling for any investor.

It does not help UK public markets that they are dominated by companies which are seen as being dated. The current top 5 (32.5% of the FTSE100) are in order: Shell, AstraZeneca, Unilever, HSBC and BP. These would not be considered at the forefront of technological change or thematic investing.

Best of the rest

Another problem is that companies which are being listed have had the life squeezed out of them. Typically it is companies which have been bought by Private Equity, improved (usually by saddling a whole lot of debt onto them) and re listed.

The problem is these firms have been stripped of any value, and are usually listed at an over-the-top valuation which means the only way for the share price is down. Also they have little or no investment put into them which leads to them dying through a thousand cuts. Debenhams is an example of this, and subsequently went bankrupt.

Often the best companies are being invested in privately by VC funds, meaning few are making it to public markets.

Are public markets all bad?

Not necessarily so. There are some good companies, but these are not necessarily fast growth that some US tech companies have delivered.

Next plc’s CEO, Lord Wolfson, is always worth listening to. His insightful and sensible approach to business means that you can increase your knowledge as well as your wealth. Next plc has a track record of underpromising and over delivering. It is also using its top of the range logistic platform to add brands to its website and fulfil with good customer service. The current cost of life crisis could be a problem for earnings growth though.

Another leader in its field is ABF, known for its ownership of Primark. Its strategy of selling clothes at rock bottom prices has paid dividends. Indeed during the pandemic its confidence in its ability to shift stock, meant it did not need to resort to discounts. It is not all rosy though, as its legendary low prices are also being questioned by a particularly influential segment of society.

Diageo has shown a consistent ability to increase its margins through its offering of premiums drinks. Yet will it be able to continue with China’s slowing growth? China has been a focus for the company, as more Chinese people aspire to higher quality brands as a mark of their success.

Conclusion

First impressions count. Sadly the first impression of UK public markets are not attractive. Having said that, when you look under the bonnet there are companies worth investing in. In the current rising interest rate environment, companies who can pass on price increases to customers are the ones to own. Companies like AstraZeneca and Unilever are well-placed in this regard.

In the end it cannot be denied that UK public markets do not contain a large number of exciting companies. It is essentially composed of good companies with moderate growth and decent dividend payouts.

For those who approach investing on a risk adjusted basis, such a return is attractive when you consider the reduced volatility that such companies provide. Being able to sleep soundly at night is to be sniffed at. In today’s increasingly uncertain geopolitical world, UK public companies are an embodiment of the “Keep calm and carry on…[making money]’’ mantra which is a hallmark of Britain!

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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