Investors who are actively avoiding UK stocks due to concerns over the political backdrop could be missing out on some interesting valuation opportunities, according to AJ Bell’s Russ Mould, particularly given the lack of exposure to Brexit from some of the cheaper blue-chip stocks in the FTSE 100.
Sentiment towards the UK market has remained negative during 2018 as Brexit negotiations have continued and an unstable political environment has put many international and domestic investors off investing in the UK market.
Indeed, during 2018, the blue-chip FTSE 100index has delivered a loss of 7.24 per cent – to 17 December – as the below chart shows.
Performance of FTSE 100 in 2018
Source: FE Analytics
“In total return terms, the FTSE 100 has underperformed again relative to its global peers in 2018,” said AJ Bell’s Mould (pictured). “It has done less well than the USA, Japan, eastern Europe, Latin America, western Europe and Asia, faring better than only the Africa/Middle East region.” 
Domestic investors are also selling out of UK equities, with the Investment Association recording outflows of almost £4.5bn during the first 10 months of the year.
While the UK stock market does face significant headwinds aside from Brexit, in the shape of a sluggish economy and the growing threat of a no confidence challenge from the Labour Party, AJ Bell investment director Mould said investors who are avoiding the UK equity market may be missing out on some potential value opportunities.
Mould said while it may not pay investors to be too “gung ho” given the number of headwinds challenging markets, investors still may be able to prosper through careful stock selection.
“After all, the index is already trading at levels last seen in December 2016 and even languishes below the high reached at the climax of the technology bubble in December 1999,” he explained.
Indeed, the AJ Bell investment director said a good degree of bad news may already be factored into the valuation of UK assets.
Furthermore, the devaluation of sterling since the referendum on EU membership in June 2016 has made valuations even more attractive.
Since the referendum, sterling has fallen by 15.05 per cent against the US dollar and by 14.72 per cent against the euro, according to data from FE Analytics.
A ‘hard Brexit’ or ‘no deal’ scenario could lead to a further decline in sterling making stocks even cheaper, said Mould, although the ‘sterling down, FTSE up’ trade has not been as successful recently, with the blue-chip index suffering alongside other markets in the Q4 sell-off.
In the event of a ‘soft Brexit’ or delay to the Article 50 process, the FTSE 100 could see a relief rally as some uncertainty is lifted.
As such, the FTSE 100 may have a better chance of breaching the 8,000 level – from a level of just under 7,000 currently – than many suspect, claimed Mould.
Top 20 cheapest FTSE 100 stocks based on 2019 (P/E) ratio
Source: AJ Bell
Given the underperformance of UK stocks in 2019, the AJ Bell investment director said, there are a number of companies in the blue-chip FTSE 100 index which look cheap on an earning basis, offer an attractive dividend, or both.
“Unloved often means undervalued and the UK is not expensive relative to its international peers or its own history on an earnings basis, with the FTSE 100 trading on around 11x consensus earnings estimates for 2019,” he said. “In total, 31 FTSE 100 firms trade on a price/earnings [P/E] ratio of 10x or less for 2019.”
The 20 cheapest are listed above.
“Even if some of the earnings forecasts upon which those multiples are based prove optimistic, it is still possible to argue that you can buy good quality UK-listed firms cheaply, especially if you are an overseas investor, with sterling still relatively depressed,” Mould said.
A compelling yield argument can also be made for investment in UK stocks, the AJ Bell investment director noted.
Mould said UK equity valuations look attractive on a yield basis with the FTSE 100 offering a prospective yield of 4.9 per cent based on aggregate consensus analysts’ forecasts for 2019.
“This beats the 0.75 per cent Bank of England base rate pretty handily and also outstrips the 1.25 per cent yield available on the benchmark, 10-year UK gilt,” he said.
Top 20 forecasted highest yielding FTSE 100 stocks
Source: AJ Bell
“There are 36 firms within the FTSE 100 which offer a yield of more than 5.5 per cent,” added Mould, with the top 20 by yield listed above.
“The yield available from those 36 stocks, and the index overall, does at least mean that investors will be compensated at least to some degree for the risk they are taking with UK equities while they patiently wait to see how the political shenanigans in Westminster and negotiations with Brussels ultimately pan out.”