Outlook 2025: Helpful catalysts for UK equities

We think the new year will look familiar to UK equity income investors. Many of the market catalysts that resonated in 2024 remain in place, with companies undervalued versus history and versus other markets.

We would expect to see dividend growth from the companies we invest in, and this should allow our strategy to do what it aims to -- provide income and achieve capital appreciation.

We see the supportive backdrop for UK equities continuing. For example, we think the pace of corporate activity in the form of mergers and acquisitions can maintain a healthy pace. This reflects the low valuations of good companies as well as well as a stable economy and government. We would expect that overseas companies, trade buyers and private equity firms will want to do more deals to acquire UK assets at attractive premiums.

Buyback trends

The pace of share buybacks in our market also is likely to remain robust. We expect 2024 to be the third consecutive year with buybacks in total of around £50 billion, well above the historic run rate. Premier Inns owner Whitbread (£100 million buyback) and HSBC ($3 billion program) are among the those recently announced.

Companies will acquire their own shares if they deem them to be undervalued, and reducing the number of shares in circulation boosts earnings on a per-share basis. We view a buyback program as positive also because it indicates the company’s dividend is well supported and can potentially be progressive. The range of businesses buying back shares has varied across sectors and included larger and smaller companies, and they have been well-received by the market.

Rates fall

Another supportive catalyst that we see continuing is the favourable interest rate environment. The Bank of England (BoE) cut rates for a second time this year, in November, to 4.75% from 5.0%. The European Central Bank has cut rates three times this year and the US Federal Reserve has cut twice.

The BoE signalled that rates would continue to move lower – gradually, and it raised its 2025 economic growth forecast slightly, to 1.5% from its August estimate of 1%¹. As stock pickers, we leave the economic forecasts to others, but slow and steady growth suits us. We think the UK consumer is in a fairly good place, with healthy levels of savings and rising wages.

Following the uneventful UK election, the government’s first budget generated some concern in the bond market around the amount of gilt issuance needed to support spending plans. Higher gilt yields are unhelpful to income investors – and to the government, which must pay more to borrow. Still, we welcome the government’s focus on economic growth and expect they will improve the messaging going forward.

We note also that sterling has remained relatively stable, which we believe reflects international investor confidence about putting money to work in UK.

Higher taxes

The companies we speak to are expecting flat growth in earnings in 2025, and some have scaled back forecasts. They will be paying higher taxes including national insurance as a result  of the budget. Overall, we think company expectations are in a good place, however, neither overly optimistic nor overly pessimistic.

In our strategy, we may consider deploying some gains that banking stocks have generated over the last year into sectors such as life insurance, energy, industrials and construction, where valuations are more modest.

More clarity

Over the last year we’ve gotten clarity on several key issues and events -- the UK election, the new government’s taxing and spending priorities, the US election and the pivot in central bank policy from raising rates to cutting. To be sure, geopolitical issues including the wars in the Middle East and Ukraine remain as unpredictable as ever and could have market implications.

Nevertheless, we continue to believe that a UK equity income strategy has an important role to play in a diversified investment portfolio. We aim for our strategy to deliver an income in excess of the market’s and that grows above inflation. In addition, there is the  prospect of meaningful capital returns as the companies we invest in prosper, and we feel confident that UK stocks offer an excellent entry point for investors.

Sources

¹https://www.bankofengland.co.uk/monetary-policy-report/2024/november-2024

Fund risks

• Interest Rate Risk - The strategy can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates, e.g. the value of a bond tends to decrease when interest rates rise 1
• Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
• Market Concentration Risk (Geographical Region/Country) - Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.
• Derivative risk - the strategy may use derivatives to reduce costs and/or the overall risk of the Fund (this is also known as Efficient Portfolio Management or "EPM").
• Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the strategy.
• Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the strategy’s assets.
• Smaller Companies - The strategy invests in smaller companies, which can be less liquid than investments in larger companies and can have fewer resources than larger companies to cope with unexpected adverse events. In less favourable market conditions these companies may therefore under-perform larger companies and the strategy may under-perform funds that invest predominantly in larger companies.

Important information

This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI.