Global investors shun the UK, while canny corporate buyers are taking an interest. Who is right?
- While investors reject UK assets, the corporate sector believes there is value.
- Valuations and yields look attractive compared to the rest of the world
- The absence of a catalyst for a change in sentiment continues to be a problem
The UK stock market has been widely unloved by global investors. Yet companies are buying like mad and instigating some chunky share buy back programmes. While investors see little value in UK assets, clearly the corporate sector believes they have some worth. Who is right? And should investors be paying attention?
The UK All Companies or UK Equity Income sectors have been the worst-selling for seven out of the last 12 months. The most recent Global Fund Manager Survey by Bank of America Merrill Lynch showed pessimism towards the UK market at an all-time high – 42% of the managers surveyed said they were underweight the region. ETF flows have been negative. Unsurprisingly, UK markets have been weak relative to their global peers.
Yet this has left some apparent value. Adam Avigdori, fund manager on the BlackRock UK Income fund, points out that, at 4%, the UK dividend yield has only been higher once in the last 20 years. Free cash flow from UK companies is as high as it has ever been and the UK market compares on conspicuously lower valuations compared to the rest of the world.
Certainly, the corporate sector appears to agree. From Melrose’s bid for GKN, to Fox’s bid for Sky, to CME’s takeover of Nex Group, international buyers seem to believe there is value to be found in the UK. Unilever has just launched a significant share buy back programme, which also supports this view.
The problem is the lack of a catalyst. Short of a full and favourable conclusion to the Brexit process, it is difficult to see what would change investor sentiment towards the UK. Even though progress has been made towards Brexit, the Government is fond of reminding us that ‘nothing is agreed until everything is agreed’ and that is not going to happen quickly.
Stronger growth may do it. The UK has had a sustained drag on consumer spending as inflation has exceeded wage growth. That has just started to reverse and this may see some momentum return to the UK economy.
Either way, it seems that poor sentiment towards the UK may have gone too far and the stock market is going cheap. Corporate buyers know it, and maybe investors should take note.