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UK stocks finally shine

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Your eyes aren’t deceiving you: UK stocks really are on a roll. In March, I described the FTSE 100 index as “approaching its own record, with all the grace of Mr Bean on ice skates, in a force 10 gale, carrying two bowls of custard, in the dark”. I keep it. But the thing about Mr Bean is that he usually gets there in the end.

The UK’s main stock index has now surpassed 8,000 points for the first time, marking a gain of more than 9 per cent so far this year. Even turning to the dollar to allow easier comparisons makes the UK one of the biggest winners in Europe in 2024, and represents a respectable challenge to the US.

Hargreaves Lansdown, who serves retail investors in the United Kingdom, believes the market is “proving that it has got its mojo back.” It has a lot of charm to recover.

UK shares barely feature in conversations with international fund managers unless the issue is forced. Taken together, the market now represents simply too small a portion of global indices to matter beyond specialists, and the main index has drifted sideways for most of the past five years. UK shares are known to be unappreciated by a large part of the country’s pension system and overall allocations have been shrinking for decades.

But there’s nothing like a bull run and a series of new records to pique investor interest. Ben Russon, co-head of UK equities at asset manager Martin Currie – part of the Franklin Templeton empire – says several things have gone right to change the mood.

One of them is bargain hunters, attracted by weak valuations. With the FTSE 100 having a P/E ratio of 14, the UK is one of the cheapest developed markets in the world. This is in stark contrast to the alarmingly high valuations in the United States, where the ratio is above 25.

Another is the lack of exceptionalism in the UK, in a good way. Some of the harsher aspects of Covid’s economic impact have also faded or fallen in line with their peers. And although the Bank of England refrained from cutting interest rates this week, there is still plenty of confidence that its next move will be down rather than up. Strong oil prices have also helped the country’s large contingent of resource reserves.

A steady stream of companies leaving the London market to embrace private equity houses, or merge, has long suggested that public markets are undervaluing UK products. Broker Peel Hunt estimates that so far this year, 21 companies worth a total of £24.6bn have announced they are leaving.

But this is certainly not all bad, says Russon, especially now that he has reached the real heavyweights, including BHP’s proposed £31bn takeover of Anglo American. “There are offers, counter-offers and rumors of counter-offers,” he said, all in support of UK shareholders.

Some brilliant exits into new markets at the moment (unfortunately a somewhat distant prospect) would provide further impetus. “It would be absolutely helpful to have some fresh blood,” she said. “It sends the message that London is a place where you can and should list your business. If you continue to have acquisitions and don’t refill your hopper, you will shrink the pie.”

The elephant in the room, politics, does not seem to deter investors, despite the prospect of a general election later this year. Recent local elections and opinion polls clearly suggest that Labor is on course to unseat the Conservatives in power, but investors are noticeably relaxed about such an outcome. If anything, investors say it’s harder to imagine what incumbents would do with another term in office (and everyone remembers Liz Truss).

In any case, politics generally matters little for UK stocks. Goldman Sachs analyst Sharon Bell did the math and found that, on average, the FTSE 350 has tended to fall around Labor victories and rise slightly after Conservative victories, but “the differences are not large and there has been a considerable spread of results.” Any rise after a conservative victory is generally only fleeting, he added.

Given the boost that buybacks and dividends have given to big UK shares, Bell has raised its target on the FTSE 100 to 8,800 in 12 months – unspectacular perhaps given we are now above 8,400 , but with a clear sense of bullish momentum. Meanwhile, the more domestically focused FTSE 250 looks “exceptionally cheap”, he says.

UBS has also upgraded the UK from “least preferred” to “most preferred” in its global strategy. “Stories have abounded about the market’s bleak outlook, with low valuations commonly cited as a reason for companies to choose to list elsewhere,” wrote Dean Turner, an economist at the bank. “We believe the conditions are in place for the UK to change this narrative,” he said, pointing in particular to a brighter outlook for global manufacturing, which in turn should support stocks linked to oil and industrial metals.

Deutsche Bank has also reiterated that the FTSE 100 is its “favorite index in Europe” and that it continues to prefer European stocks over US ones. It was a long and often frustrating road to get here, but the UK is finally starting to attract a crowd.

katie.martin@ft.com