Is the UK really a no-growth market?

It has become a familiar refrain that the UK market lacks options for growth investors. Investors tend to turn to it for dividends, or for a naturally defensive tilt in a downturn, but the prevailing wisdom is that growth investors need to explore the stock markets of Asia or the US to access the most exciting themes in the global economy.

Part of the reason the UK has picked up this reputation is that the concept of growth in financial markets has become increasingly narrow. Investors have equated growth initially with technology, then with Artificial Intelligence (AI), and then with an increasingly narrow segment of the AI industry – those companies involved with building out AI infrastructure.

On this definition, the UK cannot compete. It does not have semiconductor companies, cloud computing groups, or AI pioneers. Its listed technology is tiny, limited to a handful of smaller companies, and it has no Silicon Valley-style ecosystem pumping out the technology giants of the future.

However, that is not the same as saying it has no skin in the game on digitisation. The UK has companies that could harness AI to turn their proprietary data into strong, usable insights for their customers. These are companies such as Experian, Relx or the London Stock Exchange. At a time when investors are wondering ‘what next’ for AI, these companies can legitimately claim to be the next wave of beneficiaries.

Powerful growth themes

The digital transformation theme is one of four key growth themes in the Murray Income portfolio. The other themes are less explored by investors in the current AI-focused environment but may prove equally as powerful in the longer term.

The ageing population, for example, is a multi-year trend across many Western economies. Populations are becoming top-heavy, increasing the strain on healthcare systems and the public purse. Some of the beneficiaries are clear: the pharmaceutical sector is operating against a backdrop of increasing demand for medicines, for example. The pharmaceutical companies we hold in the portfolio – AstraZeneca, GSK and Novo Nordisk – all have drugs that address major healthcare needs such as cancer treatment, vaccine development and obesity care.

We also hold Convatec, which specialises in chronic care. This is an unglamorous but crucial area of healthcare. The company has four divisions: wound care, infusion care (supplying the cannulas for diabetes pumps), continence care and ostomy care.

Haleon is slightly different. There is still a gap between life expectancy and healthy life expectancy, which will need to be addressed to reduce the strain of ageing populations on public healthcare systems. It has areas such as vitamins, specialist toothpaste, pain relief and indigestion relief. In particular, the group sells Centrum Silver, one of the very few vitamins with clinical trials proving that they work to improve cognitive ability and bone strength in people over 50.

Energy transition

The UK remains at the forefront of the energy transition. The incoming government has made clean energy a priority, which creates a supportive environment for companies in the energy sector. Great British Energy aims to accelerate investment in renewable energy, and offshore wind in particular.

National Grid is a vital cog in the transition to renewable energy. It should benefit from investment in transmission and distribution, but also from renewed support for decarbonisation. It began the ‘Great Grid Upgrade’ in May, adapting the UK’s transmission and distribution infrastructure to meet the growing demand for electricity. National Grid estimates that electricity consumption in the UK will increase by approximately 50% by 2036 and more than double by 2050, placing increasing pressure on the grid.

The distribution of energy generation will also change as renewable energy sources come on stream, with electricity generated by wind farms needing to move to the areas of greatest demand, particularly the UK’s major cities. This will require significant infrastructure development. Overall, the asset bases of National Grid and SSE will increase significantly.

There are other important businesses involved in the transition. Genuit, for example, has a range of products that helps homes become more energy efficient. That includes underfloor heating, recyclable plastic pipes and ventilation products. It is likely to see growing demand as efficient homes become a priority for government.

Emerging global wealth economies

While the UK’s economic performance has been lacklustre, there are pockets of growth across the world. There are emerging, fast-growing consumer economies in Asia and Latin America for example. UK companies are tapped into the potential of these markets. These might include Unilever and Diageo, who are selling powerful brands to growing consumer markets around the world. 58% of Unilever’s business is now in emerging markets. These will be key beneficiaries of growing global wealth, and we see an attractive pipeline of growth.

AI infrastructure is by no means the only growth theme in the global economy. And after a strong run for the technology giants, it may be past its prime anyway. These areas of growth have been overlooked in the race for AI, and as a result, their valuations are often more attractive. Investors do not risk a Nvidia situation, where the market greets a 122% rise in revenue with a shrug because expectations are so high. In many cases, investors have not yet spotted the potential for many of these companies.

The UK does have growth. It just doesn’t have the type of growth that markets have wanted. We believe this could change as investors recognise that they don’t have to pay high prices to tap into supportive long-term themes in the global economy.

Charles Luke is a senior investment director at abrdn and investment manager, Murray Income Trust Plc.

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