The once hyped “Buy UK” stock trading is proving cheap and unloved

Buy UK stocks trading, taken for granted by many in early 2021, appears to have backfired as UK stocks posted record outflows this year despite being as cheap as they have been in more than three decades.

The valuation discount of the MSCI UK Index compared to world stocks, which appeared after the Brexit referendum in 2016, widened further in the course of 2021 and is now the widest since 1990 at 35 percent in terms of the price / earnings ratio.

While a partial recovery from COVID-19 has helped the index jump a solid 13.6 percent year-to-date, bringing it to its best year since 2016, it is lagging both US and Eurozone indices in local currency after.

It shouldn’t work that way. A year ago, investors expected UK stocks to be ahead of their competitors thanks to their cheap price and the UK’s lead in vaccinating the population in 2021.

However, concerns about interest rate hikes, a supply chain crisis in the economy affected by Brexit and possible political instability in the next year were blamed for the relatively weak performance of the stock market.

“The UK got off to a good start, but it didn’t last. Some UK stocks have been a classic rebound game and have been exposed to inflation too, but that narrative has dropped, ”said Stephen Payne, fund manager at Janus Henderson Investors.

UK equity funds saw record outflows of £ 14 billion (US $ 23.8 billion) in 2021, according to Refinitiv Lipper, surpassing £ 12 billion in 2016 when the UK voted to leave the European Union.

More capital has flowed into UK equity funds this year than any other country in Europe combined, with outflows of around £ 9 billion.

BofA Global Research’s monthly fund manager survey showed that UK stocks are the most underweight in all markets through 2022, while stocks from the euro zone are the most overweight.

FORGET THE PRICE LABEL

This time again, the persistently low prices at the turn of the year cannot persuade investors to part with their money. BlackRock, the world’s largest wealth manager, is neutral and prefers European stocks. “The problem with UK stocks is that Brexit will exacerbate the situation of high inflation and supply problems,” said Anthilia fund manager Giuseppe Sersale.

“This will affect margins in the future and cause the BoE to tighten monetary policy compared to the ECB and maybe even the Fed.”

Investors expect interest rate hikes of nearly 90 basis points (bps) from the Bank of England by the end of 2022, compared to 72 bps from the US Federal Reserve and less than 10 bps from the European Central Bank.

Mr Sersale cut his UK allocation to neutral in October as markets increased the BoE’s rate hike bets.

HSBC Private Banking and Wealth Management also cut UK stocks to neutral this month, even though valuations are “very attractive”.

“The market is concerned that the combination of BoE rate hikes, increased social security contributions and rising dividend taxes could slow the recovery,” said Willem Sels, HSBC’s global chief investment officer for private banking and wealth.

Sector composition has also penalized UK equities, with nearly half of London-listed blue chips in mining, energy and finance – all of which tend to be cyclical – and few in faster growing technology.

“The UK stock market is made up of many energy and mining companies that we are not currently invested in,” said Jeremy Leung, portfolio manager at UBS Asset Management.

He sees more opportunities in smaller IT companies.

While the cheapness of UK PLCs sparked an unprecedented wave of takeover interest, mostly from cash-rich private equity funds, it has not translated in significant stock returns.

London’s efforts to attract fast-growing tech companies have also stalled, with some high profile IPOs trading well below their list prices.

Despite the widespread tribulation, some remain optimistic.

Jefferies said cheap valuations and “an improving dividend stream” make them bullish, while Jupiter fund manager Richard Watts is bullish on mid-cap UK stocks, which he expects to have high disposable income and strength of the labor market will benefit.

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