Turning the analogy to the prospects for the UK equity market, I will avoid any comment on the short-term outlook for the economy (I do not see any edge in looking for changes in the way the runner looks), but will instead focus on what I believe is more important – the long-term fundamentals and valuations.
On the fundamental front, return on equity and profit margins have been known drags for UK investors in recent times and are currently lagging behind the world average by approximately 2.5 per cent each over the past year.
While the composition of the UK market means we would not necessarily expect this to normalise relative to global averages, we do need to acknowledge that these metrics tend to have mean-reverting properties and may go some way in explaining the inferior earnings cycle. To say this in the context of Brexit, "normal" profitability metrics in the UK could see stronger earnings numbers and fundamentally offset any downside risk to revenues.
On the valuation side, the UK also appears to be keeping a reasonably steady pace (relative to its fundamental baseline) while other key markets such as the US continue to sprint ahead. This is reflected in the valuation-implied return framework in the chart, showing the relative attractiveness of the UK to other developed markets. While it is wise to factor in the uncertainties Brexit brings – including the currency implications – a margin of safety continues to exist.
As we can see, marathon running and the UK economy share many parallels. Just as the Morningstar founder and executive chairman Joe Mansueto said: “We want to win the marathon, we don’t want to win the next mile necessarily. The short-term game . . . that’s a very hard game to play; you don’t see many people who build wealth on that dimension.”
I wish all investors saw it this way.
Dan Kemp is chief investment officer of Morningstar Investment Management Europe
Key points
It is possible to equate monitoring the health of the UK economy under Brexit negotiations to a marathon.
It is important to look at fundamentals in the UK economy to gauge its long-term health.
