‘UK Plc’ going cheap

Despite a wave of potential negatives – BREXIT divorce negotiations, North Korean ‘sabre rattling’, European political uncertainty and slowing China growth to name but a few – global stockmarkets made further upwards progress last year, led by the tech- heavy US stockmarket with the S&P500 index posting new record highs. With interest rates beginning to trend higher, market commentators have increasingly begun to focus on stretched valuations by historic standards as many stocks have been significantly re-rated on enthusiasm for President Trump’s low tax, pro-growth agenda.

Given that (at the time of writing) the FTSE All-Share Index is actually lower year-on-year, many UK investors will be left wondering what all the fuss is about; numerous domestic sectors of our market have seen lacklustre trading conditions prevail for some time now, with many share prices drifting lower due to a distinct lack of interest in UK equities. Certainly, a combination of BREXIT, a weakening currency and the shadow of Jeremy Corbyn will have put some overseas investors off allocating to the UK stockmarket and this explains the significant ‘under- weight’ position that many such fund managers currently hold.

It is though precisely this lack of interest (and money flows) which has begun to throw up some interesting opportunities for investors focused on valuation. With a current price/earnings (or PE ratio) of approximately 14 and a dividend yield of nearly 4% the FTSE certainly compares favourably on relative valuation grounds with, for example, the S&P500 (PE 22, yield less than 2%) and there are many sectors within the UK benchmark trading on even lower valuations. is is unlikely to persist forever, however, and will either be addressed by a general re-assessment of UK companies’ prospects and funda- mentals, or alternatively an increase in take-over activity and shareholder activism.

History is littered with examples of Great British companies falling prey to foreign predators and, given the devaluation of sterling since the referendum, ailing share prices and low valuations could see overseas groups begin to pounce on vulnerable companies across a wide range of industrial sectors. Just in the last few weeks we have seen French tyre manufacturer Michelin agree a deal for UK engineering group Fenner, property group Hammerson (owner of Birmingham’s Bullring and Leicester’s Highcross shopping centres) has received an approach from Klepierre (another French company; no worries about BREXIT across ‘La Manche’ it would seem!) and UK bank Barclays has taken the interest of activist fund manager Sherborne Investors, which has recently taken a 5% stake.

Other companies that have, from time-to-time, been rumoured to be on the radar of foreign bargain-hunters include pharmaceuticals giant Astra Zeneca, tobacco group Imperial Brands, media operator ITV and insurer RSA. There are however numerous companies that could be placed in a similar bracket and it would not be surprising to see further corporate activity over the coming months. With growth continuing to surprise on the upside, strong employment numbers and growing optimism about the prospects for UK Plc in a post-BREXIT environment, now could be the time to reassess the place for domestic UK shares within your portfolio.

Should you wish to discuss any of the above commentary in further detail, or would like to discuss your investment strategy in general, then please contact our investment management team on 01604 621421.

Source of index and valuation data quoted: Vanguard Group (20th March 2018)

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