The last year has been tough on the FTSE 100, which fell 12% in 2018. It wasn’t the only index to suffer, with MSCI World dropping around 8%, but UK stocks have been hit harder than most lately and Brexit has taken much of the blame.
UK going cheap
I’ve received a stack of analyst reports claiming that as a result, UK stocks are now seriously undervalued. Seb Jory at boutique fund manager Tellworth argues that investors have “a once-in-a-decade opportunity after a slide in valuations seen only at the nadir of most cycles”, as the UK lags other markets. He says on a forward price-to-earnings ratio, UK equities are currently in the cheapest 10% of readings since 1996.
That puts the UK at a 20% discount to global equities, the largest since the financial crisis. Brexit is a clear headwind but Jory said it was being used as a “handy scapegoat” for fund managers to take a default underweight position on the UK, given the risk of no deal. They could quickly go overweight if the outlook brightens.
Biding time
Plenty are biding their time. Terence Moll, chief strategist at Seven Investment Management, is waiting until a no-deal exit is off the table. “We remain overweight the pound in the belief that Brexit won’t be disastrous but are not yet ready to position for a sustained rally in UK equities so remain underweight.”
James Clunie, manager of the Jupiter Absolute Return fund, wisely suggests “gently adding to UK domestic stocks on bad days”.
Deal or no deal?
The danger is that you pump cash into the market, only for Britain to crash out without a deal. However, David Zahn, head of European fixed income at Franklin Templeton, argues that a no-deal Brexit could boost markets by bringing clarity.
The initial response would be negative but then Zahn says things will get better. “We don’t think a hard Brexit would necessarily be the end of the world. In many ways, it could offer the quickest route to the certainty that markets crave.”
Home front heroes
Lee Wild, head of equity strategy at Interactive Investor, says domestic stocks will benefit from a softer Brexit. Potential beneficiaries could include housebuilders Persimmon, Barratt Developments and Taylor Wimpey, retailers Marks and Spencer and Next, and high street banks Royal Bank of Scotland and Lloyds Banking Group. The domestic-focused FTSE 250 could also rebound sharply. Some FTSE 100 stocks are very nicely priced.
Victor Hill, macro strategist at Master Investor, says both UK stocks and sterling are undervalued, as the economic fundamentals have remained surprisingly robust with output and earnings both up and inflation down.
All-Share surge
This means living standards are rising and public finances are improving at last. “The FTSE All-Share Index fell about 11% last year but could enjoy a reversal of fortunes in 2019. If there is some kind of deal, the markets would no doubt heave a huge sigh of relief.”
If you are investing for 10, 20 or 30 years, even current Brexit shenanigans should be little more than a blip. Take advantage while you can. If you’re still not convinced, there’s always China.
