Cheap but shunned UK stocks are a buy

The UK stockmarket’s performance relative to the global average over the past 12 months has been “the worst in over 40 years”, says a Morgan Stanley note. A bungled pandemic response and ongoing Brexit uncertainty aren’t helping. Yet the key issue is the FTSE’s sector mix. This has been the year of the technology stock, but out of 15 major world markets, only Australia and Switzerland have a lower technology weighting than the UK. Our indices are heavy on unfashionable commodities and financial stocks. The FTSE 250 is down by 18% so far this year, while the FTSE 100 has shed 21%. 

The FTSE 100’s cyclical sectoral composition – “consumer discretionary, energy, materials and financials” – means it is badly hit when the economy tanks but also poised to outperform when the global economy finally normalises, says Capital Economics. A no-deal Brexit would be bad news for the domestically-focused FTSE 250, but the more international FTSE 100 would probably shrug it off: a falling pound would boost overseas earnings in sterling terms, countering the negative domestic shock. UK stocks are “approaching pariah status”, as Alan Brierley and Ben Newell of Investec put it. But they are now trading at the greatest discount to global equities for 50 years. Value investors may find that some of the best bargains in global markets are available at home.