Fears over Brexit and the prospect of a Jeremy Corbyn-led Labour government have made UK stocks the ‘cheapest in the world,’ according to the UK asset manager River and Mercantile’s Hugh Sergeant.
Investors have shunned UK stocks since the country voted to leave the European Union says Sergeant, with more than £1.8 bn ($2.4 bn) flowing from the IA UK All Companies sector in 2017 alone.
Concerns are also growing that an ‘anti-business’ Labour government could have disastrous effects on both the stock market and the UK’s economy.
Sergeant, manager of the £263 mn River and Mercantile UK Equity Long Term Recovery Fund, says these two factors have made the UK stock market attractively valued compared to other major indices.
He notes on average, versus shares globally, UK shares are nearly as cheap now as they were during the financial crisis, when stock markets crashed – and are significantly below their late 1990s peak.
‘The UK has rarely been this cheap and after recent Brexit and Corbyn fears, it now leads the rest of the globe in terms of value for money,’ says Sergeant in a company statement.
‘A lot of this value opportunity is tied up with Brexit and the associated threat of a change in government. Like consensus, we have been cautious since the original Brexit vote.
‘But where we stand today is that these uncertainties are now largely discounted, that the policy uncertainty is reducing, that consumer sentiment is bottoming out and, perhaps most importantly, that the UK equity market is global in nature as is the source of its revenue and profits.’
Sergeant adds that the long-term value UK equities have historically delivered – thanks to the combination of both returns and dividends – made it the most attractive equity market globally.
‘As the Barclays Equity Gilt Study for 2018 reminds us, UK equities have generated a real compound return of 5.1 percent per annum over a 118-year period that has on average been as eventful as the last couple of years. So buying our domestic market as cheaply as it is today should be a good idea if you have a medium-term time frame,’ says Sergeant.
River and Mercantile’s UK Recovery Fund – which has returned 92 percent over the last five years versus the Investment Association’s UK All Companies sector average return of 49 percent – is overweight mining stocks and banks, among other sectors, on the view that they represent some of the best value opportunities currently.
Conversely, the fund is underweight ‘defensive’ sectors, in particular utility, telecoms and consumer staples companies.
Banking is a key area where Sergeant thinks investors can find value, and the fund has positions in HSBC, Lloyds, Standard Chartered and Barclays.
He says: ‘Banks are lowly valued around the world, have strong balance sheets, generate lots of free capital, are shareholder value focused and, in a number of cases, are able to grow again after many years of restructuring.’
