UK stocks are very much unloved by global investors at present. Brexit uncertainty continues to linger and investors are concerned about how potential interest rate hikes this year could affect the economy. As fund manager Neil Woodford puts it, many investors across the world see the UK as a “basket-case.”
Often, investing in a country or asset class when it’s out of favour can be a profitable strategy over the long term. With that in mind, here’s a look at three key reasons why now could be a great time to buy UK stocks.
Global allocations
Global portfolio allocations to UK equities are near record lows at the moment. In March, Bank of America Merrill Lynch’s global fund manager survey found that pessimism towards UK equities was at an all-time high. A massive 42% of global fund managers stated that they were underweight the region. When investing for the long term, it can pay to go against the herd. In other words, now may be a good time to invest in the FTSE 100 or the FTSE 250.
Overseas interest
Old Mutual Global Investors’ head of UK equities Richard Buxton believes that, given this lack of interest from global investors, UK investors should be filling their boots with local stocks right now. Buxton points out that there is a ‘dichotomy’ between the views of global fund managers and the views of foreign corporates, many of which are looking at the UK for M&A opportunities. This is a subject that Neil Woodford also touched on recently. In recent months, we’ve seen bids for Fidessa, Hammerson, Fenner and Laird, all from overseas companies. It’s clear that global corporates see value in the UK relative to the rest of the world. This suggests that if you like investing in stocks that offer value, now could be a good time to be buying UK equities.
Performance and valuation
It’s also worth considering the performance of the UK stock market relative the US stock market over the last decade or so. Since its mid-2007, pre-Global Financial Crisis highs, the FTSE All Share index has risen around 17%. That’s not a great return. In contrast, the S&P 500 index has surged almost 70%.
As a result, looking at the valuations of the two indices, the FTSE All Share index certainly appears to offer the better value of the two right now. It currently has a trailing P/E ratio of 15.3 with a trailing dividend yield of 3.1%. In contrast, the S&P 500 currently sports a trailing P/E of 22.1 and a dividend yield of just 1.9%. Would you rather buy an expensive market or a cheaper one?
Weighing up these factors, it appears that now could be a great time to invest in the UK stock market with a long-term view. UK stocks may remain out of favour in the short term, but in the long run, investors should be well rewarded.