UK equities: changing of the guard as new king takes over

In monarchies, eras are defined by the reign of a king or queen. Saturday’s coronation of King Charles III got Lex wondering what lay ahead for UK investors- and how different it might be from the 70 intervening years since the investiture of the late Queen Elizabeth II.

One indication of where investors’ hearts lay back in 1953 comes from the coronation issue of the Financial Times. Lex then pondered whether bonds – which we defined as gilts and the interwar perpetual consols -looked attractive against purchasing power over a century.

In some respects, not much has changed. Bonds then yielded just over 4 per cent, not much more than the longest-dated gilts at present. In 1952 price inflation stood at a rate of about 10 per cent but would slow to 3 per cent by the end of 1953, similar to today.

There was no mention in Lex of equities. Discussion of stocks themselves languished in a different section, just before classified ads and price data. The cult of equity which began in the mid-1950s in the UK had not yet kicked off. Equity returns since the 1953 coronation have trounced gilts and cash, both before and after inflation.

Equity dividend yields were running at about 5 per cent, according to Mike Staunton of the London Business School. Today, they are just over 4 per cent.

If you expected an alien-sounding group of top 10 companies by market valuation, you would be surprised. Shell, BP (Anglo-Iranian Oil) and British American Tobacco were on the list, as they are today.

It is hardly a given that those three stalwarts will still top the rankings of stocks the next time a British monarch is crowned. Climate change and the decline in smoking could wipe out their main sources of income. The first issue is the most overarching: unless business models change radically, carbon transition could damage the prospects of 23 per cent of the FTSE 100, which is accounted for by commodity companies.

Shell, BP and BAT may still rank highly, but already they have shrunk when measured as a percentage of FTSE 100 capitalisation over the past two decades. BP has more than halved to 4.3 per cent and BAT’s importance has collapsed more than three-quarters to 0.3 per cent.

Most British investors would wave a flag for a remunerative markets transition under the environmentally-conscious Charles. They would like to see a few big tech and renewables companies in the indices by the time of the next coronation.

Which companies could lead the FTSE 100 in decades hence? The Lex team is interested in hearing more from readers. Please tell us what you think in the comments section below