The end of a long winter for UK stocks?

UK stocks have been out of favour for so long that ruling them out of portfolios is almost reflexive for many. Yet an alliance of interested investors is growing, which could soon chase away the pervasive gloom. 

UK stocks have traded at a steep discount to peers abroad and their historical averages for so many years that it has become accepted as normal. It really isn’t! immediately before the Brexit vote, UK stocks traded on a par with the MSCI World. With an election in the offing and the central bank eyeing looser monetary policy, the chance of change is becoming more apparent. Before all the Olympic medals are tallied in Paris we could have a fresh government and lower interest rates. Meanwhile, demand for UK shares seems to be rising. Private equity buyers are snapping up deeply discounted British businesses. Listed companies are looking to pick up rivals for a song too, as well as buying back record amounts of their own shares. Professional investors are sniffing around once more too and retail investors could soon follow.  Frontrunners Labour are touting plans to encourage pension funds to increase their investment in UK companies, which could create another support for this stock market.

Across the Atlantic the world’s biggest stock market is highly valued and well-owned, while the American economy’s vital signs are weakening. And, to top it off, it’s at the start of a lengthy election cycle that is noisy and likely only to get noisier. If investors start to look around for cheaper alternatives or to diversify their risk, the UK could be a beneficiary.

Turning a corner?

The UK is the world’s sixth largest economy, yet its stocks make up just 4% of the MSCI World Index. Its companies are valued at an almost 40% discount to the worldwide developed market average. If this starts to reverse, I think this about-turn could build up a lot of momentum.

Everywhere I look there are signs the UK is turning a corner, in terms of both the macroeconomic backdrop and investor sentiment. Inflation continues to trend down and GDP returned to growth in the first quarter, giving the Bank of England room to cut rates gracefully. All this provides the long-awaited catalysts that might allow UK equities to catch up.

There’s already a positive sign from the pound. Sterling is vying with the dollar as the best performing G10 currency year to date. This is partly due to UK interest rates remaining higher for longer after disappointing inflation figures and stronger than-forecast GDP growth, but it could also be because of greater demand for UK stocks from global investors. The Bank of America Global Fund Manager Survey shows investors have started to add noticeably to UK stocks.

A quick and early resolution to the UK’s recent political stumbles, and the likely election of a new government led by Labour, could engender a patriotic pivot akin to what we saw in the feel-good 90s. It may curtail the constant downbeat narrative from the nation’s hair-shirted media. It would also be another brick in the wall to rebuild the UK’s reputation among global investors. The recent float of high-quality business Raspberry Pi, which earnt its stripes making software and hardware for kids to learn about computers, adds a small frisson of excitement to UK PLC too. And helps to counter lazy, negative group-think about London’s appeal as a listing venue.

UK companies have been overlooked and abandoned for years. Will 2024 mark a turning point? If investors wait to find out, they could miss out on the gains.