Will UK stocks finally get a break?

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The health of the UK stock market is moving inversely with media interest in the UK stock market. The more we care, the more it hurts. The more pain, the more we care.

Here's what the relationship looks like in the diagram:

And we can't help but care, which is why we're sharing some arguments from Barclays and Goldman Sachs on why it's a good time to buy UK stocks.

In a note published on Wednesday, Barclays said reflation trading should be good for all the things left behind by the AI ​​generative hype cycle. The UK's lack of technology “remains a structural handicap, but with the upside now widening from growth/quality winners, the UK value-oriented market is starting to catch up,” she tells clients.

The steady rise in oil/commodities means UK EPS momentum should improve, providing some support to depressed valuations. The commodities/value/defense-heavy FTSE 100 index means it may also act as a stagflation hedge, should the risks of geopolitical/supply issues persist. Furthermore, the upside for GBPUSD may be limited as the Bank of England (BoE) begins a more aggressive cutting cycle than the Fed.

The IBES consensus estimate for earnings per share growth for the MSCI UK index is 1.9 per cent for 2024. Barclays says this looks lenient, not least because the energy and materials sectors represent nearly a quarter of the MSCI UK index by weight.

If the price of oil is rising because of improving demand, it should be supportive for stocks overall, while if it is rising because of geopolitical risks, the UK's mix of commodities and defenses makes it uniquely attractive as a stagflation hedge, he says.

UK equity valuation multiples are low, and [equity risk premium] For the region it also looks fairly high versus the US. Of course, the undervaluation of UK stocks versus US stocks is largely due to their value tilt and lack of exposure to big tech companies, and this is unlikely to completely reverse any time soon, in our view. But we believe that if investors feel more comfortable with the soft landing narrative and improving earnings outlooks for value sectors such as banks and commodities, this could at least provide a footing for UK valuations.

At Goldman, they were telling clients this week that the UK “offers one of the best entry points in its history (at least on a relative basis).”

The FTSE 100 trades at a P/E ratio of 11.6x. This rating places the UK in the 38th percentile for its history (since 2006). In contrast, global stocks achieved a P/E of 16.8 times (90th percentile versus their own history), and [ . . . ] Most countries trade at rates well above their historical averages. On this basis, the FTSE 250 looks more attractive. It trades at 11.3x PE, at the 18th percentile year-to-date. Even the UK SMID-cap index offers a steep discount to the UK Large Cap index – more than one standard deviation below the 10-year average.

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Here comes the B word.

Peak anxiety about Brexit?

This is Barclays, which claims that incoming and outgoing governments have “shown a willingness to work more closely with the EU in recent times”. Her team cites Rishi Sunak's signing of the Windsor Framework and Keir Starmer's pledge to build on the Trade and Cooperation Agreement.

Whatever happens in the next election, “the prospect of a closer relationship with the EU may generate more goodwill among investors and, after eight years, some of the Brexit risk premium may begin to decline.”

As depression complications emerge, inbound M&A and buybacks are seeing a revival, which could help valuations. Furthermore, savings reforms are gaining momentum, which may also improve supply for UK stocks in the medium term.

Like Goldman, Barclays sees value among domestic workers. UK small cap stocks are trading at a 20-year low compared to large caps.

Recent sterling strength has done nothing to reverse persistent outflows from FTSE 250 ETFs, which “likely indicates an entrenched negative view on the UK domestic outlook,” says Barclays. Earnings momentum has turned positive for domestics, which are highly volatile, so as financial conditions ease, there is plenty of scope for the rate to return, the report says.

This all seems reasonable. When the FTSE 100 and FTSE All-Share are near record levels while the FTSE 250 is around 18 per cent below its 2021 peak, the 'buy domestics' stance also seems fairly rational.

Is the London market really over the worst? It would be a rookie mistake to equate a bull market with a healthy market. High prices will tell us nothing about the long-term trends of stock dumping and IPO shopping, which are creating problems almost everywhere, nor about the heavy-handed approach taken by UK regulators to capital markets. .

However, if broad-based deflation picks up strong money outflows and lifts some of the negativity by bringing investors back to UK citizens, the measure we started with, the market health of media attention, will show to be a seriously lagging indicator. . .

In-depth reading:
Why London's vibrant stock market is in recession (Bloomberg)
– The decline in the London stock market begins to appear final (The Telegraph)
– The London Stock Exchange crisis is getting worse (Evening Standard)
– The UK stock market is not working (The Guardian)
– The London Stock Exchange – is not floating, but sinking (The New European)
– London markets are down and closed, says the head of pharmaceutical companies (The Telegraph)
– London fears for its future as companies defect to Wall Street (CNN)
— The London Stock Exchange has now passed the peak of its global influence (City AM)
– Stubborn discount indicates declining attractiveness of UK stock market (FT)
— Market view on London shares: They hate them (Evening Standard)
– London stock market 'heading down', industry veteran warns (The Telegraph)
– The London Stock Exchange crisis is getting worse (Evening Standard)
– How the British stock market is dwarfed by the big European rally (The Telegraph)
– 'There are no local equity investors': why companies are fleeing the London Stock Exchange (FT)
– Displacement: Eight worrying signs for the London Stock Exchange (City AM)
– City veteran Richard Buxton: The stock market is past its best (Daily Mail)
– The London Stock Exchange slides into a severe crisis (Econostrom)
— Performance and ratios are a drag on the London IPO market (FT)
– Over-regulation has destroyed the London stock market (The Telegraph)
– Only quick fixes can save the London Stock Exchange from displacement in 2024 (City AM)
– Midlife Crisis on the London Stock Exchange (Investor Register)
– Concerns about 'uninvestable' London stock market as more companies tend to leave (Evening Standard)
– IEA: The media is creating a negative “atmosphere” around the moribund IPO market (City AM)
– Media: LSEG is creating a negative “vibe” around the moribund IPO market (FTAV)
-etc.