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Fund managers eye fightback for cheap UK stocks

The UK stock market has lagged overseas rivals since the Brexit vote, but some fund managers believe that could change.

 
Fund managers eye fightback for cheap UK stocks
 

Fund managers are eyeing a recovery for cheap UK shares, as the stock market continues to be shunned by global investors following the Brexit vote.

While UK stocks have rallied since the UK's vote to leave the European Union, their performance has lagged that of other major global markets.

Sentiment towards UK stocks has not been helped by global fund managers selling UK shares in their droves.

Bank of America Merrill Lynch's monthly fund manager survey has shown an entrenched pessimism towards UK stocks, with global managers currently running a net 36% 'underweight'. The last time global investors were this bearish on the UK was during the financial crisis.

This is despite a solid performance from UK companies, with FTSE All-Share earnings up 20% over that last year. The index is broadly flat over the same period after the global sell-off over the last three weeks, meaning its shares have become cheaper.

Cheapest stocks in two years

'From a valuation perspective, the FTSE All-Share is now trading at its cheapest levels at any point in the last two years, with the market on 13.1 times forward price-earnings versus a long-run average of 14.1 times,' said Blake Crawford, Citywire A-rated manager of the JPM UK Dynamic fund.

'Jump across the pond and you'll find the S&P 500 trading on 15.7 times. The data is out there to support a recovery.'

Ed Legget, manager of the Artemis UK Select fund, also highlighted the potential for the UK stock market to emerge from the shadows, supported by a recovering pound and rallying oil price.

'In the global context, we believe the UK market's exposure to sterling and commodity prices, combined with the underweight positioning of international investors, represents an environment in which the UK stock market could perform well relative to other regions,' he said.

While a strong pound tends to hamper the UK stock market in absolute terms, given companies' reliance on overseas markets for revenues, it gains a comparative advantage over global markets, whose returns for UK investors suffer even more.

The sell-off of the past few weeks, driven by fears of higher interest rates, has meanwhile reinforced Legget's conviction in the value stocks he is favouring.

'Standing back and looking at the broad picture, we believe that accelerating economic growth, accompanied by higher real wages and a slow normalisation in monetary policy is good news,' he said.

'Given rising interest rates, we maintain the fund's overweight position in financials and its bias towards value. Earnings multiples in both areas were suppressed in a world dictated by quantitative easing but now have scope to recoup some of their underperformance.'

Legget said this meant his portfolio was even cheaper than the broader US stock market, trading on around 11 times forecast earnings. 'Furthermore, the earnings of the companies in our portfolio are forecast to grow slightly faster than the wider UK market.'

The manager's main activity during January was to top up holdings in BP (BP) and start a new position in Shell (RDSb), buoyed by a rallying oil price, greater demand for liquefied natural gas and efforts from the oil majors to reduce costs.

He took profits on shares in British Airways owner International Airlines Group (ICAG) and house builders Crest Nicholson (CRST), Galliford Try (GFRD) and Redrow (RDW).

Focus on wrong risks

Margaret Lawson, manager of the SVM UK Growth fund, meanwhile welcomed the opportunities presented by the sell-off.

'However painful sharp market falls may seem, they create opportunity for investors who have a clear view of fundamentals,' she said.

Lawson argued the fears over higher interest rates had done little to dent the fundamentals of the UK stock market.

'The exuberance at the star of the year in many equities had made a number of shares overbought in the short term,' she said.

'But the underlying trends that have favoured mid-cap and new business models look persistent. The main risk to shares is not interest rates, but disruption, which is bringing challenges for older incumbent businesses.'  

3 comments so far. Why not have your say?

Micawber

Feb 21, 2018 at 18:27

The main risks to UK domestic shares are Corbyn and Brexit, surely. Is that what Ms Lawson means by 'disruption'?!

Corbyn wants to subsidise the manufacture of widgets made more cheaply in China, protect smokestack industries and attack City finance. Among international investors, the many are taking the exit, while UK stocks are for the few.....

report this

William Wilkinson

Feb 21, 2018 at 18:44

Corbyn wants to take an axe to our best industry, and in the process reduce all our living standards, it's insane.

report this

joseph o neill

Feb 21, 2018 at 20:13

You'll end up in the poor house if you listen to much to fund managers talking their own book !!.

report this

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