UK equities allocations and valuations have been held back in recent years by political uncertainty. This is changing, but valuations haven’t re-rated to reflect this – yet.
Read this article to understand:
- Why although political uncertainty persists in the UK, the reduction in Brexit-related risk could be a potential tailwind for UK stocks
- What the improving economic outlook could mean for UK equities
- Why we believe the UK is home to a higher proportion of value names for investors to take advantage of than other developed markets
In a recent survey that looked at the willingness of investors and fund selectors to increase exposure to various asset classes and sectors over the coming months, UK equities topped the list – with 36 per cent of respondents saying they were willing to increase their exposure to the sector.1
Many investors have had relatively little exposure to the asset class
This marks a step change from what we’ve seen for most of the post-European Union referendum period, where many investors have had relatively little exposure to the asset class. There are several reasons for the change in outlook:
1. Political stability
Brexit uncertainty and hung parliaments remained a drag on allocations to UK equities over the past five years. While political risk has not disappeared completely, uncertainty has to some degree been allayed by a Brexit agreement and a government majority of more than 80.
2. UK economic growth rebound
Thanks to one of the most successful vaccination programmes in the world, allowing society and the economy to open earlier and more robustly than originally anticipated, UK economic growth is forecast to be around 6.5 per cent in 2021, and six per cent in 2022, according to the Office for Budget Responsibility, with unemployment peaking around five per cent.2
3. Attractive valuations
UK equities are currently trading at among the lowest price/equity levels versus global markets for the last two decades. This is not simply because of the UK market’s greater skew to energy and financials, supporting the premise of a UK-wide discount. Current valuations combined with the above points are key drivers of the recent surge in UK M&A activity, a trend we expect to continue.3
4. Market factor rotation
Quality growth has significantly outperformed other style factors for over a decade, creating a historic divergence between other style factors such as value and cyclicals. There were sharp signs of a reversal in that trend between November 2020 and March 2021, during the strong rally that followed positive post-vaccine announcements. While growth reasserted itself for a few months, this started to reverse again in mid-September 2021. Interestingly, the start of 2022 has seen another sharp move from growth to value, with the UK equity market still home to a large proportion of value names for investors to take advantage of.4
5. Robust regulatory and legal framework
The UK is home to one of the longest-standing equity markets in the world, and its transparent listing requirements give investors’ confidence. It has a relatively good record of governance, while shareholders have typically yielded more influence to positively change large, listed companies through voting and engagement.
6. Global exposure but cheaper
Around 80 per cent of revenues for companies in the FTSE 100 are generated outside of the UK, and even around 50 per cent of revenues in the ‘more domestic’ FTSE 250 are generated overseas. Valuations are low for global winners.5