Brexit and Corbyn fears make UK equities ‘cheapest in the world’

Fears over the impact of Brexit and the prospect of a Jeremy Corbyn-led Labour government have made UK stocks the ‘cheapest in the world’, according to River and Mercantile’s Hugh Sergeant.
Investors have shunned UK stocks ever since the country voted to leave the European Union, with more than £1.8bn[1] flowing from the IA UK All Companies sector in 2017 alone.
Concerns are also growing that an anti-business Labour government could have disastrous effects on both the stock market and the UK’s economy.
Sergeant, manager of the £263m River and Mercantile UK Equity Long Term Recovery fund, said these two factors have made the UK stock market attractively valued compared to other major indices.
He noted on average versus shares globally, UK shares are nearly as cheap now as they were during the financial crisis, when stock markets crashed – and are significantly below their late 1990s peak.
“The UK has rarely been this cheap and after recent Brexit and Corbyn fears, it now leads the rest of the globe in terms of value for money,” said Sergeant.
“A lot of this value opportunity is tied up with Brexit and the associated threat of a change in government. Like consensus, we have been cautious since the original Brexit vote. But where we stand today is that these uncertainties are now largely discounted, that the policy uncertainty is reducing, that consumer sentiment is bottoming out and, perhaps most importantly, that the UK equity market is global in nature as is the source of its revenue and profits.”
Sergeant added that the long-term value that UK equities have historically delivered – thanks to the combination of both returns and dividends – combined to make it the most attractive equity market globally.
“As the Barclays Equity Gilt Study for 2018 reminds us, UK equities have generated a real compound return of 5.1% per annum over a 118-year period that has on average been as eventful as the last couple of years; so buying our domestic market as cheaply as it is today should be a good idea if you have a medium-term time frame.”
Sergeant’s UK Recovery fund – which has returned 92% over the last five years versus the Investment Association’s UK All Companies sector average return of 49%[2] – is overweight mining stocks and banks, among other sectors, on the view that they represent some of the best value opportunities currently.
Conversely, the fund is underweight “defensive” sectors, in particular utility, telecoms and consumer staples companies.
Banking is a key area where Sergeant thinks investors can find value, and the fund has positions in HSBC, Lloyds, Standard Chartered and Barclays.
He said: “Banks are lowly valued around the world, have strong balance sheets, generate lots of free capital, are shareholder value focused and, in a number of cases, are able to grow again after many years of restructuring.”
[1] According to Investment Association monthly statistics, the UK All Companies sector experienced negative net retail sales of £1.8bn in 2017. https://www.theinvestmentassociation.org/assets/components/ima_filesecurity/secure.php?f=press/2017/stats/stats1217-12.pdf
[2] According to FE Trustnet, the R&M UK Equity Long Term Recovery Fund B share class has returned 92%, versus the IA UK All Companies sector average of 49.3%, over five years to 21/05/18. https://www.trustnet.com/factsheets/o/f1u2/rm-uk-equity-long-term-recovery-b