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18 June 2024

It was Warren Buffett who said ‘price is what you pay; value is what you get’. When we look at the UK equity market today, this phrase couldn’t be truer.

By Peter Dalgliesh,


UK stocks have been overlooked for more than a decade and the scale and persistence of its selling has brought valuations to levels that can’t be ignored. The FTSE All Share is on a 20% discount versus its historical average since 1990 and compared to the US, it is close to a record discount of 45%.

Perhaps it’s time for UK domestic investors to re-visit the merits of their home market as the opportunities to capture both, a good price and value can’t be ignored.


Winds of change

There have been 35 consecutive months of outflows from UK equities (to end April 2024), and UK pension funds have reduced their UK weighting from as high as 40% in the 1980’s to around 5-6% today, which explains why the FTSE All Share has struggled.

But there are signs that winds of change are beginning to stir as the FTSE 100 recently set new all-time highs.


Positive economic fundamentals

The UK market may have got off to a good start this year, but there is a growing list of factors to support accelerated earnings growth and the possibility of a re-rating in valuations.

Having come through a pro-longed period of elevated inflation, we are on the cusp of converging towards the Bank of England inflation target of 2%. This is likely to lead to a reduction in interest rates helping to ease financing pressures for corporates, households and the government.

This in turn should support economic activity and buoy domestic consumption. The rejuvenation in consumer confidence will also be supported as real incomes turn positive as inflation recedes.


Dividends, buybacks, M&A

In the same way that the UK economy is beginning to find its mojo, so too are the animal spirits among corporate management. Recognising the undervaluation of their company share prices, boards are increasing buybacks, raising dividends and exploring ways to enhance and realise shareholder value.

The rising volume of unsolicited bids for UK companies further testifies the ‘cheapness’ of UK companies, and investors are beginning to take note.

Source: Jupiter Asset Management


Cyclical and yet low beta

Arguably, one of the greatest long-term attractions of the UK market for multi-asset investors is its index composition. Being skewed to cyclicals (financials, industrials, energy, materials) and consumer staples the UK offers differentiated risk-adjusted returns, which is hugely helpful in building a diversified portfolio.

There will be times when this can act as a drag for investors, as we have experienced for a few years recently, but looking forward it feels like this headwind is beginning to change to a more favourable tailwind.

Interestingly, the UK also tends to be a low beta market to global growth, so if the US slows from its current questionably unsustainable pace of expansion, the UK offers investors a relative opportunity.


Valuation is one catalyst, but there are others

Valuation is known to be a useful guide to future returns over the long term but is seldom sufficient by itself to act as a catalyst to drive near-term outperformance.

However, we are beginning to see more concerted effort and proposals by policy makers and political parties to support and enhance the competitiveness and attractiveness of the UK financial services sector.

While the British ISA is unlikely to shift the needle, it is well intentioned. What would be more meaningful would be:

  • reduce, or better still remove, stamp duty on UK equity purchases
  • raise the minimum contributions to auto enrolment
  • increasing tax deductions on UK dividends
  • require minimum levels of UK equity exposure within UK pensions

The latter may be controversial, but at the moment we are giving tax benefits to pension schemes to allocate capital overseas, enhancing their competitiveness at our expense – this makes no sense.

Encouraging greater domestic investment will support improved productivity growth, job creation, GDP, tax revenue etc, helping to move us onto a more sustainable economic footing. Encouragingly, it appears much of this is being lobbied for inclusion within the main political party manifestos.

As things incrementally improve, the unloved, under-owned and undervalued status of the UK looks set to change for the better – hopefully representing a brighter outlook for investors.


Peter Dalgliesh is chief investment officer at Parmenion. The views expressed above should not be taken as investment advice.

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