Page 24 - DIY Investor Magazine | Issue 37

Apr 2023 24 DIY Investor Magazine · A VALUE VIEW: THE MERCHANT’S TRUST PLC Jon Cronin: Hello, and welcome to A Value View from The Merchants Trust, where fund manager Simon Gergel, offers his thoughts on developments affecting the UK market and what it means for investors. Simon, welcome to the show. Simon Gergel: Hi, Jon, good to see you again. JC: It’s great to have you with us, there’s a lot to talk about. I’d like to get your thoughts on the outlook for the UK’s major exchange, the FTSE 100, because headlines suggest the picture looks mixed. The FTSE hit an all-time high in February on the back of bumper profits for several of its constituent stocks, but there are growing fears for its future growth prospects after two major UK companies, ARM Holdings and CRH, announced their intention to list in New York. London’s share of international IPOs is clearly falling, so what’s going on here Simon? What’s your take on the FTSE 100’s current state and, more importantly, its future? SG: It’s a great question and best answered in two parts. First, you’re right, FTSE 100 hit a record high in February, but it’s not been a great index; it’s been up and down a lot, but pretty flat for most of the century. It may be unnoticed, but the UK was one of the best performing major markets last year, because of its mix of companies. We have a lot more companies in oil and gas, in mining and the banking sector: all areas that benefited from higher inflation, higher interest rates and high commodity prices. The UK market has less high growth, high technology stocks, which had a pretty tough year. The UK performed well despite what’s been going on elsewhere, but it came from a very low valuation, and valuation is often a determinant of long-term returns. The second question, regarding the future and why companies are leaving the UK, I think comes back to this valuation point. Companies naturally look at their share prices and say: why do we trade at a low valuation in the UK? Would we get a higher valuation in America? It’s not just the UK that’s suffering; German company, Linde, is moving from the DAX 30, to a main listing in the US. And you know, CRH is not the first company to talk about it; I’m happy to go into what’s happening there. JC: Yeah, I would like to dig a little deeper because it raises questions about the future for the exchange; tech is likely to be a key component in future, and the FTSE looks very underrepresented there. SG: Again, there are two things to talk about; the low valuation, and the structure of the market. The UK has some of the best standards of corporate governance and stewardship in the world, which delivers great protection for investors. The flip side is it makes if more difficult for innovative, high growth companies to float and for founders to retain control; control is, of course, the opposite of stewardship. A minority investor wants good governance and control in case the management does something you don’t like, or not in your best interest. If you have dual share classes, which are common in America, founders can have far more votes than their shareholding would normally entitle them to. The UK has been reluctant to embrace this, but how do you encourage high tech, high growth companies to float in the UK, yet retain the right level of control and governance? JC: Is there any appetite to change the rules here in the UK? SG: There’s definitely appetite from government to encourage more companies to list in the UK; regulators want to do what they can, whilst being mindful of investor protections. Investors are torn, because yes, we’d like the UK to be a more dynamic, larger market, but we have a duty to our clients, to be able to hold companies to account. It’s really complex.