UK Stocks Hit Five-Year Lows
United Kingdom equities are more undervalued compared to their United States and global counterparts than at any point over the last several years, according to new data.
Looking at the ratio of each listed company’s current share price to its 12-month predicted earnings, on aggregate, the UK stocks are trading at the biggest discount to global equities for more than five years and to the US equities since the financial crisis, according to City A.M.
The biggest factor pushing down stocks has been the reaction to the UK’s vote to leave the EU, according to the Thomson Reuters report.
“Immediately after the Brexit vote in June 2016, we saw analysts downgrade regional airlines, home builders and banks, fearing a decline in property values and threats to London as a global financial hub,” said Thomson Reuters senior research analyst, Tajinder Dhillon.
“At the same time, analysts upgraded industries that would benefit from a cheaper pound sterling.”
However analysts have since become more bullish in a number of sectors, according to the data. Currency is still playing an important role in affecting analyst sentiment, as commodities, airlines, grocers, hotels and entertainment businesses have seen votes of confidence.
Yet analysts have been less confident about sectors such as retailers. “It appears that UK consumers are shifting their capital expenditures into holidays and entertainment experiences, and out of items such as clothing and jewellery,” said Dhillon.
“The effect Brexit had on sterling has been well documented, causing import prices to soar in a sector that is heavily exposed to foreign products. Combined with weak wage growth (which has been rising recently), consumers are being squeezed and are more cautious with their hard-earned disposable income.”
According to Thomson Reuters’ analysis, the relative “cheapness” of UK equities could pique institutional investors’ interest.
“A cheap valuation combined with an attractive dividend yield could see further rotations into the UK market by institutional investors, as the UK offers an aggregate four per cent yield versus a 2.5 per cent yield globally and two per cent yield in the US,” said Dhillon.
In a controversial move last year, Seneca Investment Managers said it would completely eliminate exposure to US equities in its Global Income & Growth Trust reasoning that any more growth in price would be limited.