UK stocks offer historic value

“Those struggling to break bad habits should take inspiration from the eurozone,” says The Economist. The currency bloc blundered its way through the financial crisis, but this time around the response has been swifter. The proposed €750bn “EU Recovery Fund”, to be financed by common borrowing, may be a first step towards easing imbalances between the north and south. The European Central Bank (ECB) has soothed markets with more than €1trn in emergency bond purchases.

Why European stockmarkets lag the US

The pan-European Stoxx Europe 600 has lagged global markets this year. It has slipped by 12% since 1 January compared with the S&P 500’s 4% decline. The underperformance dates back to 2018, when Donald Trump started beating the tariff drum, says Holly Thomas in The Sunday Times. Exports comprise 45% of euro area GDP, making it unusually dependent on world trade.

Covid-19 has hit Europe hard. Credit-ratings agency Scope Ratings thinks that it may be 2022 before European countries return to 2019 levels of output. Nevertheless, things appear to be on the mend. Positive purchasing managers’ surveys this week from Germany, France and the UK look consistent with “a textbook V-shaped recovery” for now, says Carsten Brzeski of ING. The narrative around European shares is brightening, says Morgan Stanley in an investment note. The continent’s assets have been trading on a discount since 2010 because of “lingering fears” about a eurozone breakup. The proposed EU recovery fund may put that concern to bed.

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The other market catalyst is Germany’s unexpected conversion to fiscal stimulus, says Joseph de Weck for Foreign Policy. When Europe’s biggest economy spends “not only German boats are lifted”. Germany is the UK’s second-biggest trading partner, so British exporters should enjoy some uplift too. British shares are also cheap compared with their continental peers. Dividend cuts and uncertainty over Brexit have soured sentiment towards the FTSE, says Ian Cowie in The Sunday Times. That creates a chance to buy low. With British stocks being “rubbished by the herd”, contrarians and value hunters will spy opportunity. The UK still offers one of the best dividend yields in Europe and hosts many “quality companies” with diverse global revenues, says Teodor Dilov of Interactive Investor.

The value opportunity is indeed historic. Duncan Lamont of Schroders notes that on a trailing price/earnings, price/book and dividend yield, basis UK shares are trading at a 10%-20% discount to their 15-year median. Only emerging markets come close to such a large discount. With global stocks so pricey, the UK offers a rare pocket of value.