UK stocks offer historic value

With global stockmarkets so expensive, UK stocks offer a rare pocket of 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.

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. 

Recommended

Investor optimism ebbs in Indian stockmarkets
Emerging markets

Investor optimism ebbs in Indian stockmarkets

India’s BSE Sensex stockmarket index has fallen by almost 8% so far this year. Interest rates are on the rise, and foreign investors have been selling…
18 May 2022
Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Inflation is now at its highest since 1982 – is this the peak?
Inflation

Inflation is now at its highest since 1982 – is this the peak?

At 9%, UK inflation is at its highest for 40 years – and it’s not going anywhere soon, says John Stepek. That means you need to be much more active a…
18 May 2022

Most Popular

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
Is the oil market heading for a supply glut?
Oil

Is the oil market heading for a supply glut?

Many people assume that the high oil price is here to stay – and could well go higher. But we’ve been here before, says Max King. History suggests tha…
16 May 2022
Value is starting to emerge in the markets
Investment strategy

Value is starting to emerge in the markets

If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy tra…
16 May 2022