The health of the UK stock market moves inversely to media attention on the UK stock market. The more we care, the more it hurts. The more it hurts, the more we care.
Here’s what the relationship looks like in a chart:
And we can’t help but care, which is why we’re sharing some arguments from Barclays and Goldman Sachs on why now’s a good time to be buying UK stocks.
In a note published Wednesday, Barclays argues that the reflation trade should be good for all the stuff left behind in the generative AI hype cycle. The UK’s lack of tech “remains a structural handicap, but with the rally now broadening out from the extended growth/quality winners, the value-tilted UK market is starting to catch up,” it tells clients.
The steady rise of oil/commodities means UK EPS momentum should improve, and provide some backstop to depressed valuations. The commodity/value/defensive-heavy FTSE 100 means it may also work as a stagflation hedge, should geopolitical/supply issues risks linger. On top of that, GBPUSD upside may be limited as the Bank of England (BoE) embarks on a more aggressive cutting cycle than the Fed.
IBES consensus EPS growth estimates for the MSCI UK are 1.9 per cent for 2024. That looks undemanding, says Barclays, not least because the energy and materials sectors account for nearly a quarter of the MSCI UK by weight.
If the oil price is rising on improving demand it should be supportive of equities in general, whereas if it’s rising on geopolitical risks the UK’s mix of commodities and defensives make it uniquely attractive as a stagflation hedge, it says.
UK equity valuation multiples are depressed, and [equity risk premium] for the region is also looking fairly high versus the US. Of course, the derating of UK equities vs. US has been largely due to its value tilt and lack of big Tech exposure, and is unlikely to fully reverse any time soon, in our view. But we believe that if investors get more comfortable with the soft-landing narrative and improving earnings prospects for value sectors like banks and commodities, this could at least provide a floor to UK valuations.
Over at Goldman, they’ve been telling clients this week that the UK “offers one of the best entry points in its history (at least on a relative basis).”
The FTSE 100 trades on a 11.6x P/E. This valuation puts the UK on the 38th percentile vs. its own history (since 2006). In contrast, Global equities are on a 16.8x P/E (90th percentile vs. their own history), and [ . . . ] most countries trade well above their historical averages. On this basis, the FTSE 250 looks even more attractive. It trades on an 11.3x P/E, in its 18th percentile vs. history. The UK SMID-cap index is even on a sharp discount to UK Large Cap — more than one standard deviation below the 10y average.
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Here comes the B word.
Peak hard Brexit angst?
That’s Barclays, which argues that the incoming and outgoing governments have both “shown willingness to work more closely with the EU recently”. Its team cites Rishi Sunak’s signing of the Windsor framework and Keir Starmer’s pledge to build on the Trade and Cooperation Agreement.
Whatever happens at the next election, “the prospect of a closer relationship with the EU may generate more goodwill among investors and, after eight years, some of the Brexit risk premium may start to unwind,” it says.
With multiples looking depressed, inbound M&A, and buybacks are seeing a pick-up, which could help valuations. Moreover, savings reforms are gaining traction, which could also improve the bid for UK equities over the medium term.
And like Goldman, Barclays sees value among domestics. UK small-caps are trading at a 20-year low relative valuation to large caps.
Recent sterling strength has done nothing to reverse constant outflows from FTSE 250 ETFs, which is “likely indicative of an entrenched negative view on UK domestic prospects,” says Barclays. Earnings momentum has turned positive for the largely cyclical domestics so as financial conditions ease there’s lots of room to re-rate, it says.
All of this sounds reasonable. When the FTSE 100 and FTSE All-Share are near record highs while the FTSE 250 is about 18 per cent below its 2021 peak, the “buy domestics” position also sounds fairly rational.
So is the London market really past the worst? It would be a rookie error to equate a rising market with a healthy market. Higher prices would say nothing about the long-term trends of de-equitisation and IPO venue shopping, which are causing problems almost everywhere , nor of UK regulators’ decidedly flagellant approach to its capital markets.
Nevertheless, if a broad-based reflation rally helps staunch fund outflows and lifts some of the negativity by turning investors back to UK domestics then the metric we began with, market health to media attention, will be shown to be a seriously lagging indicator . . .
Further reading: — Why London’s once vibrant stock market is in a rut (Bloomberg) — The London stock market’s decline is starting to look terminal (The Telegraph) — The London Stock Exchange’s crisis is only getting worse (Evening Standard) — The UK stock market isn’t working (Guardian) — London’s stock exchange — not floating, but sinking (The New European) — London markets are broken and closed, says pharma boss (The Telegraph) — London fears for its future as companies defect to Wall Street (CNN) — The London Stock Exchange has now passed the zenith of its global influence (City AM) — Stubborn discount marks UK stock market’s diminished appeal (FT) — The market view on London stocks: it hates them (Evening Standard) — London stock market is ‘going down the gurgler’, warns industry veteran (The Telegraph) — The London Stock Exchange’s crisis is only getting worse (Evening Standard) — How Britain’s stock market is being dwarfed by a blockbuster European rally (The Telegraph) — ‘There are no domestic equity investors’: why companies are fleeing London’s stock market (FT) — Exodus: Eight troubling omens for the London Stock Exchange (City AM) — City veteran Richard Buxton: Stock market is past its best (Daily Mail) — London stock market plunges into dire crisis (Econostrum) — Performance and pedigree are a drag on London’s IPO market (FT) — Over-regulation has destroyed the London stock market (The Telegraph) — Only fast fixes can save the London Stock Exchange from a 2024 exodus (City AM) — London Stock Exchange’s mid-life crisis (Investor’s Chronicle) — Fears over ‘uninvestable’ London stock market as more firms tipped to leave (Evening Standard) — Watchdog: Media is creating a negative “atmosphere” around moribund IPO market (City AM) — Media: LSEG is creating a negative “atmosphere” around moribund IPO market (FTAV) — Etc .