The UK has been undervalued so long, with no apparent hope of a turnaround. Is there any hope ahead?
- The UK stock market is cheap on almost every measure: relative to its history, its peers and to the growth it offers.
- The UK market may have plenty of opportunities, but there are few buyers
- UK All Companies or Equity Income have been the least popular IA sectors for seven out of the last ten years
Investors have grown used to hearing that the UK is undervalued, unloved and poised for a rebound. The UK market has been out of favour for so long, with little apparent catalyst for change, that it is increasingly difficult to see what might shift the dial for this unfashionable market.
The fundamentals are unarguable. The UK stock market is cheap on almost every measure: relative to its history, its peers and to the growth it offers. UK companies are trading at a notable discount to equivalent companies elsewhere, and in many cases offer equally compelling growth and a stronger dividend yield.
The UK’s smaller companies have moved lower – not out of any apparent weakness in their operational performance, but simply because no-one is interested in buying them. UK fund managers will say that the market is cheap and there is plenty of opportunities, but this leads nowhere if there are no buyers.
In the meantime, the economic news keeps getting worse. The most recent blow to the UK has come from the Paris-based OECD, which says UK inflation will be higher in 2023 than for most G20 members (except for Argentina and Turkey). The fear is that the UK is losing economic might and may require increasingly desperate measures to revive its fortunes and curb inflation.
The question for investors is what arrests this doom-loop. The UK has the advantage that most of the selling must – surely – be behind it. UK All Companies or Equity Income have been the least popular IA sectors for seven out of the last ten years. There can be relatively few investors that have only recently been alerted to the weakness of the UK with a sudden urge to sell out.
This should mean that when sentiment changes, it will change very quickly. But the catalyst for that shift remains as elusive as ever. While the political situation has stabilised and the prospect of recession has dimmed, there is no compelling reason for anyone to buy UK equities. Private equity interest has not galvanised the broader investment community to take notice of the UK’s low valuations.
Often, it is not a single moment that brings about revived interest in a specific region. It may just be a slow burn of improving economic metrics, greater stability, and a recognition that earnings are improving. However, a sustained improvement in sentiment towards the UK remains elusive.
