Are British stocks set for a Boris bounce?

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UK equities are unloved and underrated

Could UK stocks be in line for a “Boris bounce”? asks Sally Hamilton in The Mail on Sunday. They have been “stubbornly out of favour” ever since the referendum, returning just 19% over three years compared with 43% for American equities. A “triple cocktail” of fears about a no-deal Brexit, a Corbyn government and wider political uncertainty has depressed returns. Yet that opens up an opportunity for value investors.

The murky outlook has also sent the pound to a two-year low against the dollar. A falling currency deters foreign investors. The weak pound is not all bad news, however. With so many FTSE 100 companies drawing revenue streams from overseas – Societe Generale estimates that 63% of the blue-chip index’s sales are generated outside of Europe – their profits are flattered in sterling terms. The poor exchange rate also simplifies the investment calculation for British investors. As Jason Hollands of Tilney tells The Mail on Sunday, “their pound won’t go as far in other stockmarkets such as the US”, which is another reason to keep funds at home.

MoneyWeek has been pointing out for some time now that UK stocks look cheap enough to promise healthy long-term returns. The cyclically adjusted price/earnings (p/e) ratio of 16 is cheaper than most major markets and developed Europe as a whole. Michael Mackenzie of the Financial Times also cites Credit Suisse research showing that the market’s forward p/e ratio of 12.75 is almost five points lower than the S&P 500’s. Another sign that UK stocks are a bargain with plenty of upside is a high dividend yield of 4.2%. Reinvested income is crucial to long-term returns. Investors hoping to tap into the miracle of compounding would do well to buy British.