This week I have read many articles claiming that the UK stock market is ‘dying’. Amid many concerns, financial experts say the London Stock Exchange it is a graveyard for unwanted and unwanted UK actions. I disagree!
UK stocks fall out of favor
Among global investors, UK stocks have become much less important this century. In 2000, the UK stock market accounted for one tenth of the global valuation of stock markets. Today, that proportion has collapsed to 4%.
In addition, the number of companies listed in London is declining. In January 2015, 2,429 UK shares were listed in London. By January 2023, this total had plummeted to 1,945, with this relentless downward trend.
What’s happening?
First, many companies choose to list in New York rather than London. In the US, stock valuations are consistently higher, markets are deeper and broader, and liquidity (ease of trading stocks) is higher.
That’s not surprising, given that the US market is absolutely huge. In total, US stocks are worth more than $40 trillion today, compared to $2.5 trillion for UK stocks. In other words, the US market is 16 times the size of London, giving companies access to a huge pool of investors and liquid capital.
Secondly, the London market has been described as a ‘graveyard’ or ‘museum’ of legacy, old world and low growth businesses. Meanwhile, the United States is seen as he ideal place for innovative, fast-growing and loss-making companies (especially tech companies).
A third reason for the ‘deequitization’ of London is company acquisitions and share buybacks. In the last three years, too many quality UK-listed companies have fallen for takeover bids from foreign investors. Meanwhile, many UK companies use their cash flow to buy back shares, further reducing share bases.
A fourth reason is the Brexit vote to leave the European Union in mid-2016. While in the EU, the UK would be able to trade freely with 450 million other European citizens. The UK is now seen by some as an island island of 68 million people with high taxes and burdensome corporate regulations.
Fifth, executive pay is tremendously higher in the US, which is great for corporate heads, right?
Doom, doom and gloom… and boom?
To me, UK stocks can be as unloved and unwanted as they have been in my 55 years. As a result, today they trade with modest ratings.
For example, him FTSE 100 The index trades with a price-earnings ratio of around 12 and an earnings yield of 8.3%. In addition, it offers a dividend yield of around 3.8% per year, covered around 2.2 times by earnings. To me this seems too cheap, both historically and geographically.
Of course I accept that there is a lot of FUD (Fear, Uncertainty and Doubt) surrounding the UK economy and recession risks. However, as a veteran value investor, I am drawn to cheap value/dividend/income stocks. And I see a lot of big companies trading at low valuations on the FTSE 100 and FTSE 250 indices.
As a result, from the end of 2021, my wife and I reduced our exposure to expensive US stocks and increased our stake in cheap UK stocks. In fact, when I look at the Footsie today, I see a wide range of undervalued UK stocks in sectors including banking and finance, energy, mining and telecommunications.
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