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UK equities could be undervalued. Here’s why

The United Kingdom looks as “good as I’ve seen in the 30 years I’ve been working in it”, says Pendal Group’s Clive Beagles.

  • Equities in the UK may be significantly undervalued
  • Tilt toward value stocks should help the FTSE
  • Emergence from COVID could trigger a re-rating

THE United Kingdom market looks “as good as I’ve seen in the 30 years I’ve been working in it,” says Clive Beagles, a senior fund manager with Pendal Group’s London-based subsidiary J O Hambro Capital Management.

“All the stars are aligning for investors.”

Low rates, a tilt towards value stocks, underperformance this year, an undervalued currency and plenty of merger and acquisition (M&A) activity means the UK share market has plenty of opportunities.

“The United Kingdom markets looks as good as I’ve seen in the 30 years I’ve been working in it,” says Beagles. “All the stars are aligning for investors.”

So far international managers have remained reticent about the market — often for reasons that aren’t about equity valuations.

Part of the reason why US companies are now attractive, Beagles says, is low interest rates and a tilt towards value stocks.

“The UK has the highest value bias of any market in the world,” Beagles explains. Value stocks to do better during cyclical upturns, particularly when interest rates are so low.

“Relative to Europe the UK market has fewer industrials companies and many more in services,” he says. “It also has this curious bias to commodities because oil and mining companies have always been in the market.”

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Over the past three decades, London’s FTSE has underperformed major indices on Wall Street, in Europe and in Australia. So far this year, the underperformance has been accentuated.

While London’s FTSE is up 8 per cent since January, the S&P/ASX is up 12 per cent, Germany’s DAX index is 15 per cent higher, the S&P500 on Wall Street is up 20 per cent, and France’s CAC index is up 21 per cent higher.

There’s plenty of reasons to buy into Britain.

“The currency is cheap and has been ever since Brexit,” Beagles says. “The UK is considered some sort of political hot potato but that’s been overdone.

“The politics around Brexit aren’t perfect, but let’s be honest, the politics in any democracy aren’t perfect. If you look on a purchasing power of parity basis the currency is probably 15 to 20 per cent too cheap.

“And 2021 and into 2022 will be very strong years in terms of GDP. The way the UK measures growth overstated the downturn, but that means it will bounce back further.”

Combined, these factors make the UK bourse attractive, Beagles says.

UK unusually cheap

“The UK is probably 10 to 15 per cent cheaper than Europe, and 30 to 40 per cent cheaper than the United States … and that’s unusual,” Beagles says.

There is another factor playing into the hands of investors in Britain.

“There has been an unprecedented number of companies bid for in the UK because they look cheap relative to international peers. And there is a relatively liberal attitude towards companies being bought, more so than in Europe where politics can sometimes get in the way.”

It means that international corporates are seeing the opportunity in Britain, even if investors aren’t.

“Over the last three years ever lower bond yields mean its all been about growth and momentum and that’s been good for the US and some of Asia,” Beagles says. “The UK and Europe have been viewed as lower growth. That’s changing.”

“On top of the Brexit has been going on since the summer of 2016, and it’s just been dragged out. Both Europe and the UK have suffered from that,” he says.

“But at some point all this has to manifest itself in a re-rating of the UK. If the strategy around re-openings and vaccines for COVID proves the right one, then maybe that will be the trigger point.”

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at August 11, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

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