UK equities may be keenly priced but there are few buyers willing to take advantage, according to Goldman Sachs.
The market “continues to see outflows from households, mutual funds, pension and insurance funds and foreign investors”, with the only significant buyers in the first half of the year being companies themselves via buybacks, the investment bank's analysts found. A survey of UK finance officers found that around half see local equities as undervalued, compared with less than 10 per cent in 2019.
This “de-equitisation of the UK market” means companies are also unwilling to list shares in a market they deem to be undervalued, the investment bank said in a note.
The FTSE 350 index currently trades on a forward price/earnings (PE) ratio of 10.3, well below its five-year average of 17 times, according to FactSet. By comparison, the S&P 500 trades on a PE ratio of 19.6 times and Europe’s Stoxx 600 on 12.3 times. UK equities also offer the highest major market dividend yield of 3.8 per cent, although this is still lower than the 4.6 per cent available on 10-year gilts, according to JPMorgan. Buybacks take the total return to 6 per cent, however. "We see across Europe reasonable prospects for a pick-up in both IPOs and M&A in 2024 as rates peak, inflation moderates and economies prove more resilient to the higher rate environment," Goldman Sachs analysts said. "The UK is especially attractive to corporate or private buyers given valuations and the fall in GBP."
The UK “remains one of our preferred markets”, said Rupert Thompson, chief economist and wealth manager Kingswood (KWG). The recent increase in oil prices and a belief that interest rates have peaked has meant UK shares have been outperforming in recent weeks, he added.
His firm appears to be swimming against the tide, though. Over $24bn (£20bn) has been withdrawn from UK equities so far this year, equating to around 9 per cent of the total, according to JPMorgan.
Last year, £12bn was pulled from UK equity funds, according to the Investment Association. UK equities now make up 22 per cent of the total held by investment managers, a figure that has fallen from 33 per cent a decade earlier. Over the same period, their holdings of US equities have increased from 17 per cent to 32 per cent, the IA found.
Retail investors have proved similarly circumspect. The number of households that directly own shares halved between 2004 and last year to just 11 per cent, according to think tank New Financial. It called for measures to incentivise share ownership, such as reforming stamp duty and individual savings accounts (Isa), as well as digitising share ownership.
If UK investors shareholders held a quarter of their financial assets in shares or equity funds (instead of 15 per cent currently), this would unlock an extra £740bn of capital, the think tank said.
