In the medium term, we believe it will be inflows from overseas investors that will be the crucial factor in closing the UK discount. Here, the signs have begun to turn positive:
- While flow data has been negative for much of this year, recent readings point towards an inflection: there has been an upturn in flows into the UK market from global institutional investors since the general election3.
- The latest edition of the Bank of America’s fund manager survey shows global asset allocators looking to move to an ‘overweight’ stance in UK equities for the first time in three years4.
All of that suggests that, after nearly a decade on most international investors’ ‘sell’ lists, perceptions of UK equities may be starting to change. When overseas investors return in earnest, the resulting inflows have the potential to deliver a transformative re-rating of UK stocks.
Even a small change in global asset allocation could produce a swift and substantial revaluation of the UK market
Viewed in a global context, the UK is a relative minnow; it now represents less than 4% of the MSCI World Index by market capitalisation. So, if global investors decide to reallocate even a small portion of their capital away from the US (which accounts for 71% of the MSCI World Index5), the scale of the inflows would be huge in relative terms: it’s like trying to squeeze a quart into a pint pot.
Even a modest increase in their allocation to UK shares by global investors could have a profound impact. When they start to move, valuation multiples in the UK could move higher extremely quickly.
The UK discount won’t last forever
Some retailers always seem to be advertising their latest, unmissable SALE. It’s easy to become jaded; there’s little urgency to buy when a ‘special offer’ seems to last forever. Perhaps investors have begun to feel the same way about the UK stockmarket. That, however, might prove to be a costly mistake – the bargains currently on offer in the UK might not last forever.
1 Source: Artemis/ Goldman Sachs as at 17 August 2024
2 Source: DB Numis as at 5 September 2024
3 Source: EPFR, Goldman Sachs Global Investment Research
4 Source: Bank of America Global Fund Manager Survey September 2024
5 Source: MSCI as at 30 September 2024
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