The FTSE 100 approaching a new record high puts the spotlight on UK stocks again. The index is full of shares which should thrive in the current environment – value stocks, energy producers, defensive sectors like tobacco and healthcare, and banks which benefit from higher interest rates. Valuations are cheap and dividends are generous. Key to pushing the UK market higher is luring back foreign investors.

Predictions of a big slowdown in economic growth this year due to recession don’t help, neither does the recent turmoil within the UK Government. However, markets are forward looking, and so much bad news is already in the price.

Getting a good entry point is crucial in investing and one could argue that UK equities are incredibly cheap now. Just imagine if we started to see foreign investors load up on FTSE 100 stocks. That could provide the tailwind to take the index well above its May 2018 record high.

‘The UK is incredibly unpopular in global terms, and I think there is only upside,’ says Mark Slater, manager of Slater Growth Fund (B7T0G90). ‘It would take very little to really move the market if international investors switched on to the UK.

‘Anyone who wants to be out of the UK is out so there is an awful lot of scope for upside surprise in the UK market. The precise timing is not something I think is worth agonising about. If you are looking three to five years ahead, I think people will make very good money.’

If interest rates stay elevated, then the growth stocks that populate the upper echelons of the US market could continue to find life hard. Value stocks should do better, and the UK has them in spades.

The UK became less attractive to international investors after the UK voted seven years ago to leave the EU. ‘International investor aversion to the region intensified amid trading and regulatory uncertainty,’ says Jo Rands, portfolio manager and research analyst at asset manager Martin Currie. ‘Today, the UK valuation discount versus the rest of the world remains over 30% lower than it was in June 2016.’

The negativity has lingered, exacerbated by institutional investment decisions becoming more centralised. ‘There has been an increasing preference for global allocations,’ Rands explains. ‘The US makes up circa 50% of the global benchmarks versus just 4% for the UK. This is evident when we consider actively managed asset flows over the past 36 months – UK equity asset classes have endured outflows of $79 billion versus inflows of over $300 billion for global equity asset classes over the same period.’

These UK outflows have resulted in bargains galore, so what would it take for foreign investors to reappraise the FTSE 100’s constituents? Another bad year with US stocks might do it.

It seems increasingly likely the impact of an economic slowdown will cause many large US companies to miss earnings expectations, particularly if their margins are being squeezed by demand weakness and high staff costs.

There remains a compelling argument to own UK stocks and you want to already have a position before overseas investors flock back. As Mark Slater says, it’s hard to say when that will happen, but the reasons for them doing so are growing day by day.

‹ Previous2023-01-26Next ›