Markets didn’t reject the recent UK mini-budget because it was inflationary, tweeted TS Lombard’s Dario Perkins last week. No, the problem was it was “moronic”, and an economy seemingly run by “morons” gets a “wider risk premium on its assets”.
The recent chaos at Westminster makes it hard to disagree, but it raises the question: are UK stocks cheap enough to buy?
Not according to some. “UK markets are on sale. Nobody wants to buy,” the Wall Street Journal headlined last week, while a Bloomberg headline referred to the UK as “uninvestable”.
However, talk of UK stocks being uninvestable is “alarmist”, says Havelock London’s Matthew Beddall. Over the past 30 years, says Beddall, the average FTSE 350 company generally traded on a “remarkably similar” valuation to the average S&P 500 company. That changed in the past few years. Now, UK companies look cheap relative to their US counterparts, with the number trading on “distressed” valuations reaching levels only ever matched during the 2008 crisis.
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The value case is also made by Liberum’s Joachim Klement. Even if earnings estimates were slashed by a quarter, says Klement, both the FTSE 350 and the FTSE 250 would be at or below their five-year average valuations. JPMorgan data indicate UK valuations are at record lows relative to their global peers, with the UK trading on 8.6 times estimated earnings compared to 16.3 in the US.
There is one obvious caveat — UK stocks have looked cheap for years. Cheap really can get cheaper.
