[ad_1]
Brexit imposed large discounts on UK shares compared with developed global rivals. The pandemic knocked valuations down further. Yet in recent weeks the combination of a successful vaccine rollout, growing optimism about the strength of the economic recovery and EU trade deal have triggered outperformance that appears to be sustainable.
The post-Brexit trade deal with the EU, which the European Parliament voted to ratify last week, is bare bones. In the long run, it will leave UK trade a tenth lower than it might have been, the Bank of England predicts. But securing agreement may also lower the red flag deterring international fund managers from investing in UK stocks. The record discount for the UK stock market is already beginning to unwind.
The UK’s valuation gap with the rest of the world is narrowing. Measured on a basket of metrics, including price-to-earnings and price-to-book ratios, this has gone from 20 per cent last year to 15 per cent at the latest, according to Simon French of Panmure Gordon. There has also been a surge in new fundraisings on the London market. The equity capital raised through initial public offerings was more than £7bn in the first quarter of 2021, the most since 2006.
UK indices are heavily weighted towards value sectors such as financials, materials and energy. Rising yields and the reflation trade benefit these and should continue to do so for the rest of the year.
Longer term, however, the UK must increase its exposure to growth stocks. Technology, which has been the main driver of US returns over the past decade, represents just 1 per cent of the FTSE 100. In the US, tech stocks account for almost 30 per cent. Efforts such as the Hill and Kalifa reports illustrate the UK’s desire to change this. Revised listing rules, alongside rising valuations, could make the UK more attractive to tech entrepreneurs.
Other growth sectors could also be targeted. Britain has ambitious plans to decarbonise its economy and the London market should seek to increase its exposure to those driving this transition. UK stocks will not stay cheap for much longer.
Our popular newsletter for premium subscribers Best of Lex is published twice weekly. Please sign up here.
[ad_2]
Source link
