After lagging behind its peers since the Brexit referendum in 2016, the unpopular UK stocks emerge from the shadows and start to look up, following forecasts to shine in the coming year.
Britain has lagged in performance both in local currency and dollar terms among the major equity markets for the past couple of years. Investors have steered clear of the UK shares, leaving British stocks trading at record-low valuations relative to global stocks.
Now that the Brexit transition is almost over, the UK clinched a last-minute historic trade and security deal with the European Union (EU), successfully turning over the tide. The undervalued UK shares started to hold allure as the value stocks shine in the forecast for investors.
Post-Brexit Trade Deal and the UK Economy
On Christmas Eve, British Prime Minister Boris Johnson announced that this would not be a no-deal EU exit for Britain. The announcement was quickly followed with specific details of the trade and security deal, from the “zero tariffs and zero quotas” clause to the other details relating to visa, civil and nuclear cooperation, and fishing.
Heads of states have also shared their thoughts regarding the last-minute deal. But in the end, as Oddo BHF strategist Sylvain Goyon said, it made a good case for the UK under the “context of value hunting.” According to Goyon, “the ‘end’ of the Brexit saga could be an interesting trigger to rediscover the FTSE 100” since the benchmark is geared towards industries that are sensitive to the expected synchronized economic recovery in 2021.
The State of the UK Stock Index
The lack of popularity of the British stock market is evident in the little attention that investors paid to the market-leading earnings growth of FTSE 100 companies. This results in a record-low for British stocks trading, both in earnings and relativity to global stocks.
Also ignored was the 2.5% increase for exporter-heavy FTSE 100 since the 2016 Brexit referendum vote, highlighting underperformance for the past couple of years. Though there was a 14% gain for a broad regional benchmark, the Stoxx Europe 600 Index remains low valuations despite a falling pound boost. In dollar terms, the UK index has fallen by 6.7%.
With many UK sectors trading at a “substantial discount” to both European and US peers, Goldman said that the firm is overweight. The FTSE 100, relative to the Stoxx Europe 600 Index, shows compelling valuations as it tilts toward value shares. The mega-cap gauge also seems to be less sensitive to Brexit outcomes than FTSE 250 or domestic stocks.
“We remain positive on UK equity,” Goldman Sachs Group Inc. strategist Sharon Bell said and added, “The market already looks cheap versus other assets and other major equity indices.”
Post-Brexit Predictions and the Appeal of UK Stocks
Experts believe that the UK stocks that withstood the protracted negotiations during the Brexit transition are likely to benefit the most from the last-minute resolution, including banks and homebuilders. Some Brexit boost is already showing its effect on the UK stock prices, as optimism over the then-rumored accord grew.
Now that the deal is sealed, financial and energy shares are looking up. Along with the bets on a vaccine-fueled economic recovery, the FTSE 100 has ramped up by 17% and the FTSE 250 by 19%.
Fund managers have become less bearish on UK equities, according to Bank of America Corp. In the bank survey, 18% of the respondents were underweight in the country’s equities in December versus 34% in the previous month. Despite this, the survey revealed that the country held on to the dubious title of being the least-preferred among major stock markets in December.
With the Brexit deal, strategists are optimistic that the UK market is well-positioned to benefit from a vaccine-led economic recovery. Artemis Income Fund manager Nick Shenton also shared a positive prediction, saying that companies are moving away from “extreme prudence” exercised in 2020 and are well on their way to recovering dividends in 2021.
Societe Generale SA strategists led by Alain Bokobza believe that the undervalued UK assets offer greener growth for investors. Liberum Capital strategist Joachim Klement said that British stocks would re-rate by as much as 50% over the next two years. Principal Global Investors chief strategist Seema Shah believes that Brexit may take the sheen off the market beyond the short-term bounce, as exclusion from the EU single market will likely see jobs and capital flows trickle away.
On the other hand, Mislav Mateika of JPMorgan Chase & Co. does not believe that UK equities will outperform euro-area or global peers, saying the FTSE 100’s defensive stocks may hold it back.
In the end, whether the trade deal between the UK and the EU bloc will restore confidence in the UK equities is likely to be on a “wait-and-see” state.
As the head strategist of UK Alpha at Jupiter Asset Management, Richard Buxton, said, “one of the big, unanswered questions remains whether those international investors who aggressively sold their UK equity exposure following the 2016 referendum will be tempted back to the market, given still-attractive valuations relative to developed-market peers.”