It has been some time since UK equities were anywhere near the top of most investors’ wish lists. Indeed, with the UK All Companies sector emerging as the least-loved IA fund grouping in net sales terms in six out of the past 10 years, this trend was apparent even before Brexit or ‘Trussonomics’ entered the equation – though neither has exactly helped.
The aggregate valuation of the UK market is undeniably and objectively low. The MSCI United Kingdom Index is trading at a forward price/earnings ratio of 10.7x, compared with 16.5x for the MSCI World Index. In fact, the market is even valued lower than the MSCI
Emerging Markets Index – and you can insert your own punchline here.
Yet while the UK has had a bad run, it can still boast world-leading businesses, paying high dividends, with strong operational performance. If sentiment did shift, there could be a strong case for the stock market rebounding quickly – particularly among the small and mid-cap stocks, which have been hit by concerns about the strength of the domestic economy.
Of course, risks remain. Inflation is persistent, political risk lingers and the economy is hardly flying. Yet, as we point out from page 20, the UK equities opportunity set is wider than it has been in decades and a more rational market might be more inclined to take a closer look. As and when investors do start to focus on the fundamentals, UK companies could find themselves a good deal more popular.
