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Soft U.K. economic growth is a factor in why many global investors have set aside British stocks, but discounted prices may steer investors into taking another look at the market as the country settles into a new government, according to Morgan Stanley.
The Labour Party last week won control of 411 of the 650 seats in the U.K. parliament, the second-largest majority for any party since 1945, Morgan Stanley (MS) said in a Sunday note, adding that the government change is big for a country whose markets trade at a historically large discount.
Labour will now oversee an economy that has lagged U.S. and European Union activity for years. Meanwhile, the U.K. stock market has experienced similar underperformance, MS Strategist Andrew Sheets said.
“[Getting] more out of the U.K. economy won’t be a quick fix. Instead, the more immediate factor that may lead global investors to take another look at the U.K. is price,” Sheets said.
“The long-run malaise means that the FTSE 100 (UKX) now trades at 12.1x P/E and 3.9% yield. This represents its largest-ever P/E discount to MSCI World (37%) and more than the double its average discount to equities in Europe,” he said. The valuations of the small-cap FTSE 250 stock index “are even more depressed,” Sheets said.
The U.K. economy does hold further growth potential, benefitting in part from strength in scientific research and an “extremely competitive” global services sectorm, he said. “In a world where most investors we speak with seem resigned to the idea that the rise of populism means fiscal policy can only ratchet looser, that is not what the new [Labour] government has proposed,” Sheets said.
Sheets said MS’s European equity strategy team is bullish on both the U.K. and wider MSCI Europe markets, and FX Strategy sees the British pound moving higher against the euro (GBP:EUR).
Further illustrating U.K. stock market underperformance, Sheets said the MSCI World Index (URTH) since 2010 has gained 284%, including dividends, while the same figure for U.K. stocks is 94%, underperforming by 5.2% per year. “And this malaise has been remarkably consistent: In the 14 calendar years since 2010, the U.K. stock market has beaten global stock markets only once…in 2022, a year when it still fell by 5%,” he said.
Technology is a key driver for the S&P 500 (SP500), at 33%, but for the FTSE 100 (UKX), the U.K.’s tech sector is ~1%, Sheets said.
For U.K. exposure, exchange-traded funds include include (EWU), (FKU), and (FXB).
