This week, I’ve read many articles claiming that the UK stock market is ‘dying’. Amid much hand-wringing, financial pundits claim that the London Stock Exchange is a graveyard for unloved and unwanted UK stocks. I disagree!
UK stocks fall from favour
Among global investors, UK shares have become much less important this century. In 2000, the UK stock market accounted for a tenth of the global valuation of stock markets. Today, that proportion has collapsed to 4%.
Furthermore, the number of London-listed companies is declining. In January 2015, 2,429 UK stocks were listed in London. By January 2023, this total had plunged to 1,945, with this trend relentlessly downwards.
What’s happening?
First, many companies are choosing to list in New York rather than in London. In the US, share valuations are consistently higher, markets are deeper and wider, and liquidity (ease of stock trading) is superior.
That’s hardly surprising, given that the US market is absolutely huge. In total, US stocks are worth over $40trn today, versus $2.5trn for UK shares. In other words, the US market is 16 times as large as London’s, giving companies access to a huge pool of investors and liquid capital.
Second, the London market has been described as a ‘graveyard’ or ‘museum’ of legacy, old-world companies and low-growth businesses. Meanwhile, the US is seen as the place to be for innovative, fast-growing, and loss-making growth companies (especially tech firms).
A third reason for London’s ‘de-equitisation’ is company takeovers and share buybacks. In the past three years, too many quality UK-listed businesses have fallen to takeover bids from foreign investors. Meanwhile, many UK firms use their cash flow to buy back shares, shrinking share bases even more.
A fourth reason is the Brexit vote to leave the European Union in mid-2016. While in the EU, the UK could trade freely with 450m other European citizens. Now the UK is seen by some as an insular island of 68m people with high taxes and onerous corporate regulations.
Fifth, executive pay is tremendously higher in the US, which is great for company bosses, right?
Doom, gloom…and boom?
To me, UK stocks may be as unloved and unwanted as they’ve been in my 55 years. As a result, they trade on modest ratings today.
For example, the FTSE 100 index trades on a price-to-earnings ratio of around 12 and an earnings yield of 8.3%. Also, it offers a dividend yield of around 3.8% a year, covered around 2.2 times by earnings. To me, this looks way too cheap, both in historical and geographical terms.
Of course, I accept there is lots of FUD (fear, uncertainty, and doubt) surrounding the UK economy and recession risks. However, as a veteran value investor, I am drawn to cheap value/dividend/income stocks. And I see plenty of great companies trading on low valuations in the FTSE 100 and FTSE 250 indices.
As a result, since late 2021, my wife and I have reduced our exposure to expensive US shares and boosted our stake in cheap UK stocks. Indeed, when I look at the Footsie today, I see a wide range of undervalued UK stocks in sectors including banking & finance, energy, mining, and telecoms.
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