The UK is cheap - you should invest some of your money there

UK shares are witnessing much interest from investors. John Stepek breaks down why UK stocks are attractive now.

UK stocks are being massively bought.
(Image credit: © Luke MacGregor/Bloomberg via Getty Images)

UK stocks are being snapped up left, right and centre by bidders right now.

Why the popularity?

Because as we've been saying for a while, they're cheap. Particularly if you compare them to what else is out there.

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So it's probably a good idea to go and get yourself some while stocks last...

Why global fund managers have been shunning the UK

We've been saying for quite some time that UK shares are unreasonably cheap relative to other markets.

That started largely because the Brexit vote in 2016 scared lots of investors into thinking Britain was "un-investable".

In turn, that made global fund managers in particular reason that Britain wasn't worth the bother. In a global fund manager context, that actually makes sense – Britain is a significant stock market but in terms of global market capitalisation, it only accounts for something in the region of about 5% or so, which means you can ignore or "underweight" it without really risking straying too far from your benchmark.

So if you're a global money manager, and you have no idea what the fallout from Brexit might be, and you're seeing the political chaos in the years following the vote – not to mention the purse-lipped disapproval of the whole messy business endlessly expressed by your peers – then it really is a no-brainer decision to park the entire thing in the "too hard" bin and stick the money in US tech instead.

A new piece of research from Bill Casey and Nick Kissack at Schroders puts some numbers on just how big an impact this fund exodus had. Apparently, "global investor allocations to UK equities have almost halved since late 2015, and the asset class has seen 25% cumulative outflows since June 2016", they say, referencing data from Refinitiv Lipper.

As a result – measured in US dollar terms – the UK market has underperformed to an extent "not seen since the early 1970s".

However, Brexit has now happened, and political stability is back to its average sort of levels. And in relative terms, Britain's political picture is arguably more predictable (for now) than that of many of its peers. Even on a pure political cycle basis, both Germany and France have big elections coming up whereas we don't have to put up with another one for a few years.

Of course, some argue that this is not about Brexit so much as about the composition of the UK market.

We don't have enough tech stocks. We have too many "dinosaur" companies in outdated industries. The UK is a "value" index in a "growth-y" world. Etc.

Yet, note Schroders, that doesn't explain the whole gap at all. "It does not explain the stepp discount across sectors... versus both the US and Europe... causing acquirers to congregate as a flock around the UK."

According to the asset manager's analysis, in virtually every sector bar with only a handful of exceptions, UK stocks trade at a steep discount to both European (excluding UK) and US firms.

Good quality UK stocks are cheap simply because of where they're listed

Taking the analysis even further, Schroders compares 10 "diverse good quality companies" in the UK and compare them to "their most relevant peers".

On this basis, for example, clothing retailer Next – an indisputably well-managed company, with a large online presence and prospects as solid as any in that sector – is still trading at a near-30% discount to its global peers.

It's hard to see any logical reason for that. It's a similar story for the other companies on the list, including Legal & General, Breedon and Sage Group.

As the Schroders analysts put it, "the discount in our view largely arises from where they are listed and the resulting fund flows."

In effect, UK markets are cheap because investors have just taken against the UK. We're out of fashion. And of course, in a momentum-driven world, that feeds on itself. Just as the most popular stocks get more and more popular, so those that are shunned will remain the laggards.

The thing is, in the longer run, fundamentals (for want of a better word) will out. Why? Because ultimately, fundamentals are what drive the money-making ability of a company.

The market as a whole, may not value those fundamentals. But as a result, those who do value them, are more than happy to come along and snap up a bargain.

That's why we're seeing all these bids at the moment. "Oh what, you don't want this piggy bank that spews out cash, because it's not on the blockchain and it's listed in politically toxic Britain? Well, suit yourself, I'll have it."

Sometimes investing is complicated. Sometimes it's simple. This is one of the simple times. Buy the UK.

We've been talking about the opportunities in UK stocks in MoneyWeek magazine for some time. If you haven't yet subscribed, you can get your first six issues free here.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.