Internationally speaking, UK shares are among the least loved in the world6. In developed markets, the UK is the cheapest region. The make-up of the FTSE 100 and the American S&P 500 are very different, but looking at the commonly used price/earnings ratio, the FTSE at 11.4x is nearly half the price of the S&P500 at 20.7x7.
3. Resilience
There is a lot going for the British economy today – if you can see through the gloomy headlines. Britons have more excess savings than Americans or Europeans on average. Data suggests most of the population are coping with the cost-of-living crisis. Retail sales declines have stabilised8. There is real wage growth9. The UK is becoming less dependent on others for its energy as renewables grow10. Business confidence is growing11. The upcoming election might create a new political backdrop – continuity where it matters, and – perhaps – a healthier relationship with Europe.
How high can UK equities go?
We have in Japan a recent example of what happens when sentiment finally turns on a market that has been languishing for years. Since the beginning of last year, the Nikkei 225 has risen nearly 50% in local currency terms12. There is a good chance that the UK stock market could mirror Japan’s rise.
In situations like this, where a downward spiral suddenly turns into a virtuous circle, investors on the sidelines jump in. Institutions increase their asset allocations towards the UK. Positive momentum builds.
Will UK investors win?
My big concern is about who will benefit. Currently, it looks like it will be the overseas investors and private equity houses that are pouncing on British companies, picking them up at the right time. The hefty premiums to the market price they are often paying underlines just how cheap UK shares have become and the opportunities that lie here.
I am worried that UK investors will miss out – whether that is because they have their money in global trackers, or in pension funds that shadow global index equity allocations, or with wealth managers who have followed the trend of selling down the UK and are yet to recognise the opportunity.
It seems to me a shame that the people who are generating this wealth – the hard-working employees helping to deliver strong profits – risk not getting to share in it.
In the ‘90s, investors had to be encouraged to invest globally. I believe it’s now time we encouraged them to buy British.
Paras Anand, Chief Investment Officer
Sources
1 https://www.ons.gov.uk/economy/investmentspensionsandtrusts/bulletins/ownershipofukquotedshares/2022
