The bullish outlook for UK stocks

UK stocks have outperformed several major asset classes and equity markets around the world this year. To investors looking for diversification, UK equities may present an opportunity. “Valuations are low, dividend yields are good, and there is less concern around concentrations risk,” says Lindsay Matcham, who works in futures sales trading in Goldman Sachs Global Banking & Markets. 

“At a time when we find ourselves near all-time-highs in global indices, and with the FTSE 100 outperforming in the August sell-off, this makes the UK an attractive market,” Matcham adds.

Goldman Sachs Research forecasts the FTSE 100 to rise to 8,800 over the next 12 months, up from its present level of 8,256, as of Sep. 4. The index began the year at 7,721 and has registered a year-to-date rise of close to 7%. UK equities “proved resilient in the early August correction,” our analysts note. The UK’s robust year comes after over a decade of persistent underperformance: the UK weight in MSCI World has fallen to 2.2% from 5.3% in 2010.

Over the last 10 years, the FTSE 100 has delivered a 6% per annum total return, versus 8% for Stoxx 50, and 13% for the S&P 500. Some of this underperformance is due to weak earnings, domestic political upheavals, and the lack of a large listed technology sector, but much of it owes to a sharp decline in valuation as investors have shunned UK stocks. “The issue is not that foreign investors are refusing to ‘buy British,’” our analysts write. Foreign investors own around two-thirds of the UK market cap. Rather, the issue is “a dearth of home-grown equity investing.”

As a result, companies without buyers for their stock trade at a large discount to non-UK equity, and often look to buy back shares; in fact, the only net buyers of UK equities in recent years have been corporates via buybacks, and the total shareholder yield for the FTSE 100 is twice that of the S&P 500. Cash-generative companies in telecoms, energy, and financials, where valuations tend to be low, have been particularly active in buying back stocks. Private equity purchases of UK stocks is another source of demand, and this has continued to be strong in recent years, which is unsurprising given the valuation gap between private and public assets.

While the UK lacks large technology stocks, British equities in finance, energy, and mining offer diversification opportunities from the US markets. The latter have high valuations and are very concentrated in the tech sector. The FTSE 100 is also less exposed to tariff and trade restrictions. Several government initiatives – such as a pension review (which may eventually increase domestic investment in UK stocks) and a homebuilding policy – could benefit UK equities, according to Goldman Sachs Research.

Meanwhile, inflation is moderating in the UK, giving the Bank of England scope to lower interest rates, says Matcham. Two rate cuts are forecast this year. “We expect this disinflation to continue,” he says. “Growth has remained pretty robust in the UK, which is ultimately good for UK equities.”

 

This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.