UK shares “still cheap versus virtually all other equity markets” – Smith & Williamson’s MPS

UK equities are the standout market for bargain hunters as the country emerges from both Covid and Brexit, with valuations likely to fuel a rise in M&A, according to Smith & Williamson Investment Management’s Managed Portfolio Service (MPS).

UK shares have trailed most markets globally for the past few years, with record high valuations in the US and elsewhere yet to be mimicked by the FTSE 100 and its smaller peers.

The discount to overseas markets – which currently sees UK shares trade on a forward PE of 13.42 Versus the MSCI World forward PE of 20.58* – will be eroded over time as buyers look for value opportunities, according to James Burns, co-manager of Smith & Williamson Investment Management’s MPS.

“UK stocks still look cheap compared to virtually every other market,” Burns says. “We are overweight the UK across our portfolios because we think the UK in particular will benefit from the global economic recovery.

“A lot of stars are aligning for the UK now. Firstly, Brexit has gone far better than expected, and the country’s response to the pandemic has come into its own after the successful vaccine rollout.

“Challenges remain, but the signs are that the economy is now bouncing back, and we expect the discount the country’s equity markets are trading on to narrow from here as buyers head to the UK.”

Of particular interest, according to Burns, is the potential for some of the huge sums sitting on the sidelines in private equity to head to the UK to take advantage of these bargains.

“Brexit was a big risk and no doubt kept international investors on the side lines for the past few years, but now it’s been resolved we think that will give overseas investors that confidence to look to the UK,” he said.

“There is a lot of money that has been amassed by private equity and it is always looking for opportunities. They will want a market that looks cheap and that is hard to find these days with many markets at record highs, so that makes the UK attractive.

“The recovery is also all about cyclical and value names, and that is something the UK offers in abundance, so we are happy to remain overweight to the UK, even as other markets show signs of pausing for breath after a phenomenal run.”