As
Thursday’s
election
nears,
a
tapestry
of
different
narratives
is
setting
the
UK’s
equity
markets
up
for
a
very
eventful
second
half
of
the
year.
The
UK’s
story
has
felt
more
complex
and
contradictory
than
in
the
US,
where
the
continued
dominance
of
the “Magnificent
Seven”,
especially
Nvidia,
has
made
the
first
half
of
2024
all
about
tech.
Here
in
the
UK, gross
domestic
product
(GDP) stagnated but equities
hit
record
highs and
serious
talk
of
initial
public
offerings
(IPOs)
and
M&A
emerged
once
more.
Again,
there’s
been
a
disconnect
between
the
real
economy
and
the
stock
market.
A
number
of
UK
companies
from
different
sectors
emerged
as
bid
targets:
food
delivery
firm
Deliveroo
(ROO),
mining
giant
Anglo
American
(AAL), and,
in
financial
services,
Hargreaves
Lansdown
(HL.).
The
political
noise
has
been
hard
to
ignore
as
the
half-year
period
ends,
with
the
polls
predicting
a
Labour
landslide
on
July
4.
There
is
also
a
buzz
around
the
Bank
of
England’s
hotly-anticipated
first
rate
cut,
which
is
likely
to
come
on
August
1.
Abby
Glennie,
deputy
head
of
smaller
companies
at
Abrdn,
and
lead
manager
of
the
Morningstar
Silver-rated
Abrdn
UK
Mid-Cap
Equity fund and
co-manager
of Abrdn
UK
Smaller
Companies fund,
has
previously
told
Morningstar
the
FTSE’s
gains
in
the
first
half
of
the
year
are
largely
attributable
to
the
UK
regaining
favour
with
foreign
investors.
The
GDP
reading
for
the
first
quarter
of
the
year
has
just
been
upgraded
to
0.7% and
the
IMF
is
forecasting
growth
double
that
in
2025.
Over
the
past
six
months,
the
FTSE
100
has
increased
6%
to 8,189
points
on
the
last
trading
day
of
the
quarter,
a
trend
driven
principally
by
anticipation
of
a
stronger
economy
and
the
end
of
an
extensive
mergers
and
acquisition
drought.
The
Morningstar
UK
index is
up
more
than
7%
in
the
period.
“One
of
the
negatives
the
UK
has
found
in
recent
years
is
that
it
has
not
had
the
big
artificial
intelligence
(AI)
exposure
the
US
market
has,”
Glennie
says.
“But
we
are
now
in
a
good
point
in
the
cycle
whereby
a
decent
chunk
of
industrial
and
domestic
cyclicals
are
now
lifting
the
UK
market.”
Which
UK
Stocks
Did
Best
in
The
First
Half
of
2024?
Narrow-moat
aerospace
and
defence
company
Rolls-Royce
Holdings
(RR)
led
the
pack
of
FTSE
100
stocks
with
the
best
performance
over
the
six
months
to
June
21
2024.
The
stock
returned
57.9%
during
that
time,
hitting
a
record
share
price
of
£4.76
and
outpacing
Morningstar’s
Fair
Value
Estimate,
which
remains
at
£3.80.
The
business,
which
produces
many
of
the
world’s
jet
engines,
had
benefited
from
the
surge
in
international
travel
since
the
pandemic,
but
rising
geopolitical
tensions
have
helped
the
defence
division.
NATO
members
continue
to
promise
bigger
military
budgets
due
to
counter
Russia’s
threat
–a
development
analysts
predict
will
only
boost
British
defence
companies
like
Rolls
Royce
and
BAE
Systems
(BA.).
The
financial
services
sector
did
well
too.
Hargreaves
Lansdown
(HL),
Natwest
Group
(NWG),
Barclays
(BARC),
Intermediate
Capital
Group
(ICG)
and
Beazley
(BEZ),
all
made
our
top
10
list
of
stocks
for
year-to-date
returns.
Having
enjoyed
an
initial
share
surge
in
May
after
news
of
a
potential
buyer
hit
the
headlines,
Bristol
broker
and
fund
supermarket
business
Hargreaves
Lansdown
continued
to
enjoy
a
share
price
boost.
The
finalities
of
a
private
equity
consortium
deal
that
would delist it
from
the
FTSE
100
are
yet
to
be
revealed,
but
the
event
has
provided
a
silver
lining
to
the
company’s
otherwise
lacklustre
share
price
performance
since
2019,
when
the
Neil
Woodford
scandal
broke.
ICG,
meanwhile,
has
reported
higher
pre-tax
profits,
while
banking
stalwarts
Natwest
and
Barclays
benefited
from
a
rise
in
retail
deposits
and
interest
rates
remaining
“higher
for
longer”.
Which
Stocks
Suffered
in
The
First
Half
of
2024?
At
the
other
end
of
the
performance
spectrum,
the
UK’s
consumer
cyclical
stocks
struggled
in
the
wake
of
continued
cost
of
living
concerns.
Entain
(ENT),
Burberry
Group
(BRBY),
JD
Sports
Fashion
(JD)
and
Whitbread
(WTB)
were
among
the
shares
with
the
poorest
returns
on
the
FTSE
100,
losing
32.4%,
30.4%,
23.7%
and
17.6%,
respectively.
As
public
belts
tightened
due
to
high
inflation,
non-essential
spending
took
a
hit,
as
did
the
companies
themselves.
But
they
weren’t
the
worst
affected.
According
to
Morningstar
data,
Ocado
Group
(OCDO)
was
the
worst-performing
stock
in
the
FTSE
100
in
the
first
half
of
the
year,
reporting
a
share
price
fall
of
-58.9%.
Its
underperformance
resulted
in
demotion
from
the
FTSE
100,
and
can
be
blamed
on
heightened
competition
in
the
UK’s
already-competitive
grocery
market,
as
well
as
the
cost
of
living
crisis
itself.
Whose
UK
Dividends
Look
Strongest?
It
was
a
strong
first
half
of
the
year
for
dividends.
In
our
latest
round-up
of
top
FTSE
100
dividend-paying
stocks,
we
highlighted
four
companies
whose
dividends
are
set
to
increase:
including
Imperial
Brands
(IMB),
BT
(BT.A),
HSBC
(HSBA),
and
AstraZeneca
(AZN).
Of
these,
AstraZeneca’s
latest
£2.47
per
share
dividend
will
be
its
highest
in
five
years,
and
a 7%
hike
on
the
dividend
it
paid
in
2023.
In
2021
it
paid
£2.02.
Imperial
Brands
(IMB)
and
BT
(BT.A)
are
also
both
expected
to
pay
£2.24
and
56p
per
share
in
September,
respectively,
an
increase
on
the
dividends
they
paid
out
in
Q3
2023,
when
they
paid
£2.16
and
54p,
also
respectively.
“The
dividend
picture
for
UK
equities
looks
in
reasonable
health,”
says
Mark
Preskett,
senior
portfolio
manager
at
Morningstar
Wealth.
“Of
the
largest
50
companies
by
market
capitalisation
listed
on
the
[FTSE
100],
just
six
firms
have
distributed
a
lower
dividend
in
the
first
five
months
of
2024
compared
to
the
same
period
in
2023.
“The
average
increase
is
around
the
9%
mark,
so
a
mid-to-high
single
digit
dividend
growth
from
the
FTSE
over
the
course
of
2024
is
not
an
unreasonable
expectation.
This
is
a
far
rosier
picture
than
during
the
depths
of
Covid,
when
UK
equity
dividends
fell
40%
year-on-year.”
Away
from
dividends,
UK
companies
have
continued
to
buy
back
their
own
shares, a
practice
that
is
the
subject
of
much
debate.
Buybacks
mean
companies
can
distribute
income
to
shareholders
without
being
bound
by
dividend
commitments,
and
increase
earnings
per
share
to
boot.
But
repurchase
also
begs
other
questions:
are
companies
buying
back
their
own
stock
at
a
good
price?
And,
crucially,
does
the
money
allotted
by
companies
for
the
repurchase
of
shares
starve
other
projects
of
vital
capital
expenditure?
“The
increase
in
UK
buybacks
has
been
very
pronounced,”
observes
Preskett.
“In
2023,
12%
of
UK
large
firms
bought
back
at
least
5%
of
their
shares,
which
compares
favourably
with
9%
of
US
companies.”
Which
UK
Companies
Are
Takeover
Targets?
The
bid
for
Hargreaves
Landsdown
is
one
example
of
mergers
and
acquisitions
activity
returning
to
life.
“We
have
seen
a
sharp
spike
in
UK
M&A
in
2024,
another
signal
that
the
UK
is
undervalued,”
Preskett
says.
“According
to
the
Office
for
National
Statistics,
Q1
2024
M&A
disposals
involving
UK
companies
was
more
than
£10
billion,
which
is
the
second
highest
quarter
since
2000.
We’ve
seen
more
activity
in
Q2,
not
least
the
giant
PE-backed
bid
for
Hargreaves
Lansdown.”
Richard
Marwood,
portfolio
manager
of
the
Morningstar
Gold-tated
Royal
London
UK
Equity
Income
Fund,
told
Morningstar
UK
M&A
is
now
affecting
big
companies
once
more.
“It
has
either
been
the
companies
themselves
buying
back
their
own
shares –
that
has
been
a
dynamic.
But
then
its
also
M&A
activity,”
he
says.
“It
started
at
the
smaller
end
of
the
market
but in
2024
we
have
seen
it
go
further
up
the
capitalisation
spectrum.”
The
potential
targets
of
this
activity
(and
their
bidders)
are
listed
in
the
table
below.
London-based
mining
major
Anglo-American
(AAL) was
recently
targeted
by
BHP
Group
(BHP)
in
a
takeover
bid
it
later
rejected,
while
paper
packaging
brand
DS
Smith
(SMDS) also
agreed
to
a
£5.8
billion
takeover
deal
by
its
larger
US
rival
International
Paper
(IP).
But
though
it’s
exciting –
and
arguably
lucrative
for
shareholders
who
find
themselves
in
the
right
place
at
the
right
time –
it
is
not
necessarily
good
news.
“The
real
issue
is
around
how
takeovers
and
buybacks
shrink
the
market,”
says
Marwood.
“There
is
a
little
bit
more
evidence
of
existing
companies
raising
a
bit
more
equity.
But
overall,
the
dynamic
is
that
the
UK
equity
market
is
shrinking.”
All
that
means
new
players
are
needed
more
than
ever
to
bolster
the
ranks.
In
this
sense,
the
announcement
that
Chinese
fast
fashion
giant
Shein
might
list
in
London
(bringing
a $60
billion-plus
stock
to
the
FTSE
100)
could
be
a
promising
development.
Raspberry
Pi
(RPI),
the
Cambridge-based
computer
company
that
listed
on
the
FTSE
250
index
with
a
£542
million
valuation
in
June,
is
a
smaller
addition
to
UK
public
markets,
but
its
IPO
did
at
least
add
to
the
narrative
that
UK
flotations
had
not
ground
to
a
halt.
The
stock
even
bounced
on
the
first
day
of
trading.
Investors
can
only
hope
neither
company
ends
up
in
the
same
position
as
Deliveroo:
publicly-listed,
performing
badly,
and
the
subject
of
takeover
bids.
Other
takeovers
are
worth
noting
too.
Carlsberg
(CABGY)
is
bidding
for
UK
soft
drink
maker
Britvic
(BVIC),
though
its
initial
approach
was
rejected
on
valuation
grounds.
When
Will
The
Bank
of
England
Cut
Rates?
Much
hinges
on
what
the
Bank
of
England
does
next.
Though
higher
interest
rates
have
benefited
retail
banks,
the
high
cost
of
borrowing
has
made
life
more
challenging
for
companies
and
their
consumers
alike.
At
the
end
of
last
year,
plenty
of
analysts
were
willing
to
boldly
predict
several
rate
cuts
in
2024,
and
yet
there
has
not
been
a
single
one.
It
is,
as
they
say,
though,
a
matter
of
time.
Clive
Beagles,
portfolio
manager
of
the
Morningstar
Gold-Rated JOHCM
UK
Equity
Income fund, says
he
was
surprised
the
Bank
of
England
did
not
cut
rates
in
late
June.
That
said,
he
now
thinks
fewer
cuts
will
be
needed
anyway
due
to
more
favourable
economic
conditions.
“We
might
get
two
or
three
[cuts]
and
that
might
be
it,”
he
says.
“That
would
be
very
different
to
the
consensus.
People
have
bet
on
two
or
three
this
year
and
then
another
between
75
to
100
basis
points
next
year
in
mind.
“That
could
happen
but
we
would
be
surprised
if,
after
two
or
three
rate
cuts,
we
do
not
see
an
impact
in
terms
of
activity
from
the
domestic
side
and
the
consumer
facing
side
of
the
economy.”
Beagles
adds
that
the
British
public
is
reportedly
sitting
on
around
£280
billion
to
£300
billion
in
of
excess
savings,
priming
the
UK
domestic
market
(and
the
high
street)
to
benefit
once
consumer
confidence
increases.
As
such,
consumer
stocks
ranging
from
Curry’s
(CURY)
to
sofa
manufacturer
DFS
(DFS)
may
recover
sales
volumes
not
seen
since
2019 –
with
an
accompanying
rise
in
prices
to
earnings
ratios.
Labour
Government:
Read
to
Spend
Big?
Tentatively,
a
new
government
might
also
help:
“the
market
is
ready
for
it,”
says
Beagles.
“What’s
most
interesting
is
the
debate
about
whether
a
very
large
majority
is
a
good
or
a
bad
thing
–
from
a
market
point
of
view
there
are
different
opinions.
“A
large
majority
could
allow
[Labour]
to
be
more
radical,
or
it
could
allow
Starmer
to
ignore
the
left-wing
fringe
of
his
party
and
be
more
centrist.”
Anyone
looking
to
trade
their
way
through
the
election
might
want
to
think
twice.
That
said,
there
are
real
connections
between
the
markets
and
the
real
economy.
Britain’s
infrastructure
woes
are
the
top
the
agenda
for
the
prospective
Labour
government.
If
dealt
with,
the
companies
that
solve
those
problems
could
really
stand
to
benefit.
“When
you
think
about
the
money
we
need
to
spend
on
prisons,
schools,
hospitals,
and
low
carbon
transport,
that
all
adds
up
to
hundreds
of
billions
of
pounds,”
Beagles
says.
“And
yet
many
of
the
stocks
that
are
in
the
supply
chain
are
trading
on
very
low
multiples.
These
stocks
will
be
natural
beneficiaries.
“It
is
hard
to
see
the
Labour
party
deemphasising
those
parts
of
the
market.
If
anything,
we
will
see
greater
money
being
put
to
work
there.”
