Christopher
Johnson:
Welcome
to
Morningstar.
Today
I’m
joined
in
the
studio
by
our
own
Michael
Born,
research
analyst
at
Morningstar.
Michael,
thank
you
so
much
for
being
here
with
me.
Michael
Born:
Thanks,
Chris.
Johnson:
So
today
we’re
here
to
talk
about
UK
equities.
So,
I
wanted
to
get
your
perspective
on
why
you’re
so
excited
about
them,
by
them
at
the
moment.
Born:
Yeah,
sure.
So,
I
mean,
I
think
–
and
specifically
I
think
I’m
talking
really
about
mid
and
small
caps
–
but
the
first
thing
I’d
point
to
really
is
the
valuation.
If
you
compare
these
industries
versus
their
global
comparators
like
the
MSCI
World,
you’re
seeing
like
20-year
lows.
Now,
I
mean,
at
least
when
we’re
talking
about
the
large
cap
FTSE
100
stocks,
this
is
maybe
a
comparison
that’s
of
limited
use
because
the
sector
composition
is
so
different.
But
we’ll
say
that
when
you
look
down
into
the
mid
and
small
caps,
there’s
much
more
comparable
sector
dynamics.
I
mean,
valuation
in
and
of
itself
is
rarely
kind
of
a
performance
driver,
particularly
over
the
short
term.
So,
the
three
things
which
I
guess
I’d
really
point
to
as
being
this
time
it’s
different
would
be
firstly
bids.
So,
you
see
some
kind
of
excitement
and
activity
into
those
mid
cap
names.
Particularly
for
just
UK,
you
saw
Direct
Line
and
Currys,
they
both
got
bids
last
month
and
then
DS
Smith,
we’ve
just
seen
the
kind
of
conclusion
of
bidding
war
there.
So,
if
you
can’t
get
–
realize
that
value
in
the
public
markets,
then
we
might
see
private
markets
step
in.
The
second
thing
I
would
point
to
is
the
economics.
So,
inflation
is
really
coming
down
and
then,
life
for
the
consumer
is
getting
better.
Particularly,
when
we
look
at
UK
mid-caps,
they’re
very
consumer
focused.
So,
it
should
be
maybe
a
real
performance
driver.
And
then
the
third
thing
I’d
point
to
was
earnings.
So,
we’ve
started
seeing,
particularly
into
U.K.
mid-caps,
they’ve
actually
been
outperforming
their
large
cap
peers
in
terms
of
their
earnings,
which
just
hasn’t
been
reflected
in
the
valuation.
Johnson:
Are
there
any
specific
sectors
that
you’re
finding
most
interesting
within
the
UK
small
cap
space?
Born:
Looking
at
where
managers
are
really
allocating
to,
it’s
maybe
in
“more
boring”
kind
of
industries.
So,
I
think,
you’re
seeing
like
airlines,
pub
chains,
retailers
like
Dunelm
and
DFS,
they’re
well
represented
amongst
that
peer
group.
And
the
message
there
that
I
think
managers
are
really
finding
is
like
they’re
good
businesses,
but
the
valuation
is
great.
So,
with
those
kind
of
catalysts
in
mind
to
see
a
re-rating,
you
could
see
some
dynamic
performance
over
the
coming
period.
Johnson:
So,
which
Morningstar
rated
funds
do
you
like
the
most
that
are
taking
advantage
of
cheap
UK
stocks?
Born:
We
rate
both
two
Scottish
funds,
Abrdn
and
Martin
Currie,
who
both
run
UK
small
and
UK
mid
cap
funds,
run
by
the
same
team.
They’re
both
kind
of
quality
growth
style
funds
and
really
got
smashed
when
you
had
that
turn
in
the
narrative
over
2022.
I
would
also
highlight
Artemis
UK
Smaller
which
is
more
of
like
a
core
valuation-centric
approach
and
yeah,
I
guess
offers
more
exposure
to
value
in
UK
small
caps.
Johnson:
UK
fund
managers
always
talk
up
the
cheapness
of
UK
stocks
with
the
expectation
that
valuations
and
market
sentiment
will
catch
up
to
one
another.
But
this
is
still
yet
to
be
seen.
So,
is
this
a
likelihood
in
the
near
future
or
is
it
just
a
distant
dream?
Born:
Pointing
to
those
factors
that
I
mentioned
right
at
the
beginning,
so
economics,
the
earnings
and
so
forth,
are
definitely
a
real
upside.
Well,
it
may
have
been
pushed
back
a
bit,
but
when
the
Fed
starts
to
cut,
the
way
that
I
guess
developed
markets’
central
banks
have
really
just
been
following
the
Fed
over
this
cycle,
we
would
expect
that
to
continue.
So,
when
they
do
start
to
cut
rates
over
this
year,
which
is
really
I
guess
consensus,
that
could
be
a
real
catalyst.
I
would
also
say
seeing
some
sort
of
reversal
in
the
flow
situation
because
it’s
been
a
horrible
time
to
be
UK
equity
manager.
If
you
look
at
large
caps,
it’s
been
monthly
outflows
since
Brexit,
and
even
the
last
few
years
for
being
a
mid
or
a
small
cap
manager,
you’re
just
seeing
continuous
outflows.
And
then
also
there’s
a
bit
of
a
chicken
and
egg
story
there
with
benchmark
allocations
because,
well,
looking
20
years
ago
at
MSCI
World,
it
was
11%
into
the
UK;
now
that
number
is
less
than
4%.
Johnson:
You
mentioned
boring
industries.
And
I
was
reading
an
interesting
story
about
how
the
FTSE
100’s
glamorous
members,
so
companies
like
Compass
and
Bunzl
way
outperformed
household
names
like
Barclays
and
Tesco
over
the
last
two
decades.
So,
is
this
more
reason
for
investors
to
focus
on
UK
small
caps
and
do
you
think
the
key
to
maybe
boosting
listings
on
the
London
Stock
Exchange
is
in
smaller
companies
in
the
more
boring
industries
rather
than
in
sexier
stocks
like
Arm,
for
instance?
Born:
Sure.
Well,
I
think
the
first
thing
I’d
say
is
that
the
key
there
is
to
stop
companies
leaving.
It’s
not
to
get
more
to
come
and
list.
But
certainly,
as
I
mentioned,
if
you
look
at
those
takeover
bids
that
we
saw,
they’re
not
for
your
Silicon
Valley
high-growth
style
startup
sort
of
businesses.
It
really
is
those
lower-growth
businesses,
but
the
value
is
undeniable.
So,
yeah,
I
think
we
might
be
seeing
some
of
the
boring
stocks
doing
the
heavy
lifting.
Johnson:
Michael,
thank
you
so
much
for
being
here
with
me.
Born:
Thanks,
Chris.
Johnson:
This
is
Christopher
Johnson
for
Morningstar
UK.
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