Tuesday, May 28, 2024

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UK stocks are finally shining

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Your eyes do not deceive you: UK stocks really are on a great run. In March, I described the FTSE 100 index as “edging to its own record high, with all the grace of Mr Bean on ice skates, in a force 10 gale, carrying two bowls of custard, in the dark”. I stand by that. But the thing with Mr Bean is that he generally gets there in the end.

The UK’s main stocks index has now cracked well above 8,000 for the first time, marking a more than 9 per cent gain so far this year. Even flipping in to dollars to enable easier comparisons, that makes the UK one of the biggest gainers in Europe in 2024, and puts up a respectable challenge to the US.

Hargreaves Lansdown, which caters to retail investors in the UK, reckons the market “is demonstrating that it’s got its mojo back”. It has an awful lot of mojo to regain.

UK stocks barely feature in conversation with international fund managers unless you force the subject. As a whole, the market now represents simply too tiny a slice of global indices for it to matter beyond the specialists, and the main index has drifted sideways for most of the past five years. UK stocks are famously unloved by a large chunk of the country’s own pensions system and global allocations have been shrinking for decades.

But there is nothing like a bull run and a set of new records to pique investors’ interest. Ben Russon, co-head of UK equities at asset manager Martin Currie — part of the Franklin Templeton empire — says a number of things have gone right to turn the mood around.

One is bargain hunters, lured in by limp valuations. With the FTSE 100 on a trailing price-to-earnings ratio of 14, the UK is one of the cheapest developed markets in the world. That is quite a contrast from the alarmingly high valuations in the US, where the ratio is north of 25.

Another is the lack of UK exceptionalism, in a good way. Some of the harder edges of the economic impact from Covid have also faded or fallen in line with peers. And while the Bank of England held off from cutting interest rates this week, confidence is still high that its next move will be down rather than up. Robust oil prices have also helped the country’s large contingent of resources stocks.

A steady stream of companies leaving the London market for the warm embrace of private equity houses, or in mergers, has long suggested public markets are undervaluing the UK’s wares. Broker Peel Hunt calculates that so far just this year, 21 companies worth a total of £24.6bn have announced that they’re off.

But this is certainly not all bad, Russon says, especially now that it has reached the real heavy-hitters, including BHP’s proposed £31bn purchase of Anglo American. “There are bids, and counterbids, and rumours of counterbids,” he said — all supportive for UK shareholders.

Some shiny new market listings at this point — sadly a somewhat distant prospect — would provide further momentum. “It absolutely would help to have some fresh blood,” he said. “It sends a message that London is a place you can and should list your business. If you keep having takeovers and you don’t refill your hopper, you do shrink the pie.”

The elephant in the room — politics — does not appear to be putting investors off, despite the prospect of a general election later this year. Recent local elections and opinion polls suggest heavily the Labour party is on track to unseat the incumbent Conservatives, but investors are conspicuously relaxed about such an outcome. If anything, investors say it is harder to imagine what the incumbents would do with another term in office (and they all remember Liz Truss).

In any case, politics generally matter little for UK stocks. Sharon Bell, an analyst at Goldman Sachs, crunched the numbers and found that on average, the FTSE 350 has tended to fall around Labour victories and rise a bit after Tory wins, but “the differences are not large, and there has been a considerable spread of outcomes”. Any rise after a Tory victory is generally only fleeting, she added

Bearing in mind the boost to large UK stocks from buybacks and dividends, Bell has lifted her FTSE 100 target to 8,800 in 12 months — unspectacular perhaps, given we’re now above 8,400, but a clear sense of upward momentum. The more domestically focused FTSE 250, meanwhile, looks “exceptionally cheap”, she says.

UBS also has upgraded the UK from “least preferred” to “most preferred” in its global strategy. “Stories have abounded about the market’s grim prospects, with low valuations commonly cited as a reason for companies choosing to list elsewhere,” wrote Dean Turner, an economist at the bank. “We think the conditions are falling into place for the UK to turn this narrative around,” he said, pointing in particular at a brighter outlook for global manufacturing, which should in turn support stocks linked with oil and industrial metals.

Deutsche Bank has also reiterated that the FTSE 100 is its “favourite index in Europe” and that it continued to prefer European stocks to the US. It was a long and frequently frustrating slog to get here, but the UK is finally starting to draw a crowd.

katie.martin@ft.com


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