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UK stocks ‘are cheapest they’ve been since mid-1970s’

Paloma Kubiak
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Paloma Kubiak

Investors have returned to unloved London-listed stocks since Boris Johnson’s decisive election win, but UK equities are still trading at the biggest discount to global peers in 45 years, according to one fund manager.

Investors pulled more than £13bn from UK funds in the three years following the Brexit referendum.

But the Conservative’s General Election victory in December brought with it renewed political and economic confidence and as a result, both the FTSE 100 and FTSE 250 gained, with the more domestically-focused mid-cap index rising more as a result of the ‘Boris bounce’.

Data from Calastone revealed that UK-focused funds took in an unprecedented £1bn in new capital in December, half the total flowing into equity funds overall.

Despite ‘unloved’ UK equities receiving renewed interest, they are still trading at a discount to global peers not seen since the mid-1970s, said Julian Chillingworth, chief investment officer at Rathbone Investment Management.

He said: “If we look at the UK market, there was a rally post-December. It sold off a bit as we came into January and has been bouncing over the last few days. It’s still below the peak seen in December and the market wasn’t expensive then.

“If you believe that there’s a turning point in the UK, then it’s not too late to get involved.”

International investors pulled swathes of money out of the UK in the aftermath of the Brexit vote and have yet to return due to political concerns, preferring to concentrate on their domestic markets, said Chillingworth.

But now that progress is being made towards a Brexit deal, the political and economic climate appears more stable, and UK valuations are cheap, he believes this should prompt international investors to return to the UK.

“International money will come back because people are feeling happier about politics and they’re happier that the consumer is in a better place, the economy is improving and generally business sentiment is improving.”

But a weight of money from overseas investors will push the market and stock valuations higher.

However, Chillingworth believes international investors will be “less discerning” than UK investors, wanting to buy the UK through ETFs or FTSE 100 futures as an asset allocation decision.

For the more discerning UK investor, Chillingworth said we will see more money flowing into small and mid-cap domestic names, following their positive reaction to the Conservative election victory.

Chillingworth added that in the next six to 12 months, UK investors want to be sure to be involved in equity markets “because they ought to do reasonably well”.

Sterling is also very undervalued and he expects some appreciation. “We’re not currency short-term traders so we won’t make a three to six month prediction. But we’ve done a lot of economic analysis and where sterling has been against the dollar, it looks very cheap. Based on our forecasts, we would expect in the longer term (three to five years) sterling in the $1.45 to $1.55 band.

“Obviously the FTSE 100 would not benefit as much as the FTSE 250. The FTSE 250 would definitely benefit from a higher dollar sterling rate. I would play it through the equity markets on a long-term basis,” he says.