Backing Britain: Americans have been telling the British that UK stock markets are filled with bargains
Since the start of the year, the Americans have been telling the British that UK stock markets are filled with bargains.
To date, however, this message has failed to enthuse British investors.
If you are among them, it may be worth examining your stance, with some analysts describing the UK markets as a ‘screaming buy’ for those prepared to sit tight for five years.
The bid speculation surrounding mighty BP, the fifth largest member of the FTSE 100, could be a sign that excitement may lie more immediately ahead, as inflation and interest rates stabilise. BP shares stand at 499p. Michele Della Vigna, the influential oil sector analyst at Goldman Sachs, considers the shares a buy, this week setting a target price of 640p.
This rating reflects the view that we do not sufficiently cherish our domestic companies because we are so beguiled by the glamour of the US tech giants and other constituents of the S&P 500 index. Indeed Alec Cutler of the fund manager Orbis considers that many UK companies would have twice their capitalisation if quoted on the S&P.
Amid the gloom, it can be easy to overlook that our markets are not parochial but global. Less than a quarter of the revenues of FTSE All-Share companies are generated here at home.
At the same time, there is considerable pessimism in some quarters about the prospects for UK markets, whatever the sterling qualities of their constituents and the geographically diversified nature of their operations. Even UK market fans like Cutler acknowledge that government ‘dysfunction’ is responsible for some of their predicament.
Charles Hall, Peel Hunt’s head of research, says that our markets are shrinking thanks to private equity takeovers of British tech names and a sharp drop in the number of companies going public. He says: ‘We are currently in a doom loop – where valuations are low and liquidity is reducing.’
David Coombs, head of multi-asset investments at Rathbones, argues that the share markets are being held back by ‘a lack of innovative thinking from government’, increases in corporation taxes – and by managements that he thinks are less able than those that lead corporate America.
But, the US financial giants continue to look on the bright side of Blighty. In the year to date, the FTSE 100 has dipped by 3 per cent, while the FTSE250 has fallen by 11 per cent. These may not be catastrophic declines. Yet, in midsummer, the US bank Morgan Stanley said that UK shares were the cheapest in the world, poised for recovery when inflationary pressures lessened.
Goldman Sachs has highlighted UK attractions, calculating that our leading companies provide a return of 6 per cent to shareholders.
At the beginning of this century, British shares made up about 40 per cent of the portfolios of UK pension funds; this has now fallen to 4 per cent.
Fund manager Nick Train said that Americans are replacing Britons, making investments in Experian, the London Stock Exchange, Relx and others.
Diageo, the drinks giant that owns brands such as Johnny Walker, now publishes its results in dollars. But its ranges also include tequilas like Casamigos and it boasts as a shareholder the eminent US fund manager Warren Buffett, boss of Berkshire Hathaway.
Nick Train does not expect the American presence on these businesses’ share registers will produce a rapid turnaround.
But he does contend that they could prove to be the awkward squad. For example, Nelson Peltz, the New York activist investor and father-in-law to Brooklyn Beckham, who forced Procter & Gamble to reshape itself, is now on the board of Unilever, maker of Dove, Domestos and Ben & Jerry’s.
If you believe that Peltz could revitalise Unilever’s strategy which has been dubbed ‘underwhelming’ by some major shareholders, then it could pay off to stay around at Train’s funds, Finsbury Income & Growth and Lindsell Train UK Equity which have large chunks of the group’s shares.
But it is worth noting that the majority of analysts rate Unilever a hold, rather than a buy, and that the UK markets will continue to divide opinion – such as Unilever’s most famous product Marmite. Coombs is buying British, but he is opting for gilts, that is government bonds, rather than shares.
He comments: ‘If there is any undiscovered value, our extensive research hasn’t uncovered it: this year we switched out of Diageo and into McDonalds.’
In past months, I have been backing Britain, motivated by quiet confidence rather than bullishness, putting money into companies like Diageo, Marks & Spencer and various funds. The City of London trust which owns AstraZeneca, BP and 3i Group is at a tiny discount to its net asset value (NAV) which hints at an opportunity.
But should Chancellor Jeremy Hunt do something in his Autumn Statement this month to make the UK markets great again? Definitely.