UK stocks have traded at a discount to their US counterparts for a long time and to some extent this has been justified. But there are signs things are starting to change.
Investors have been moving away from US shares and into other assets – including cash and UK stocks. And I’ve been looking for opportunities ahead of a potential FTSE 100 bull market.
Fund flows
The results of Bank of America’s monthly fund manager survey for March generated some interesting data. The headline is that US stocks have been declining in popularity.
Participants reported moving from being 17% overweight US shares in February to being 23% underweight in March. That’s interesting, but there was something else that caught my eye.
Rather than where the money’s been taken from, I’m interested in where it’s been going to. And along with European equities, emerging markets, and cash, the answer’s UK stocks.
During March, investors went from being 18% underweight UK stocks to 4% overweight. And I think that’s a significant indication of improving sentiment.
Valuation
Investing though, isn’t about being in front of the latest stock market trend. It’s about finding situations where a share price doesn’t reflect the value of the underlying business.
This involves looking for situations where the market’s underestimating a company. And the chances of this are best in markets where investors have a less positive outlook.
Despite the activity, UK shares still trade at a discount to their US counterparts. The S&P 500 trades at a price-to-earnings (P/E) ratio of 27, compared with 17 for the FTSE 100.
By itself, this doesn’t say anything about value. But it’s a sign investors still think US shares have better prospects, which is why I’m still mostly focusing on the UK for stocks to buy.
Packaging
Macfarlane (LSE:MACF) is a manufacturer and distributor of specialist protective packaging. And I think it’s a strong business with shares trading at a relatively attractive price.
The firm doesn’t have the advantages of scale of other packaging companies and this creates risk. But its distribution business isn’t what makes it attractive from an investment perspective.
Macfarlane’s manufacturing division focuses on specialised markets like aerospace, medical devices, and automotive parts. These are often expensive and breakages can be costly.
This means designing and engineering bespoke protective packaging for these products can be highly lucrative. And a strong position in this industry is the big attraction of Macfarlane.
I’m buying
Regardless of whether or not investors are shifting from US equities to UK stocks, I think Macfarlane shares look good value. That’s why I’ve been buying them for my portfolio.
Revenues and profits fell slightly in 2024, due to a tough trading environment. That’s an ongoing risk to consider, but I think there are some important long-term strengths.
As the company expands, its operating margins have grown consistently over the last 10 years. And I think there could be more to come, making the stock attractive at today’s prices.
