With the Brexit trade deal over and the implementation of the COVID-19 vaccine continuing at a rapid pace, UK stock stocks could be “the trade of the decade”.
This is the view of Research Affiliate founder Rob Arnott, who said the end of the COVID-19 threat was now in sight in the UK, potentially creating a “true final wind” for its economy and market. of equity.
A combination of factors, including uncertainty surrounding Brexit and the devastating impact of the pandemic, pushed UK stockpiles to “unlikely cheap levels” by the end of 2020, Arnott said, and they remain “remarkably low “.
The country has emerged as one of the first leaders in the launch of vaccination, as 17.9 million people, about a third of the population, already received at least one dose. The government expects to vaccinate all adults by the end of July. It has also set its roadmap out of blockade, with the aim of removing all restrictions on June 21.
The post-Brexit trade agreement, agreed in December, has also removed many concerns, although some areas, such as financial services, remain unresolved.
“All over the world, value is traded with extremely deep discounts on growth. No matter how we measure valuation, growth value discounts exceed 95% of the history of the respective country or region, except in Australia, ”said Arnott-led analysts.
“Brexit winds and rapid vaccination against COVID make the UK’s low valuation especially appealing,” they added.
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In January 2016, Research Affiliates named emerging market (EM) values as the trade of the decade. Analysts said they still liked EM stocks, but that the UK equity market, and stock stocks in particular, were now even cheaper.
Source: Research Affiliates that uses data from CRSP / Compost and Worldscope / Datastream
“UK equities stand out for offering one of the most attractive risk-return compensations, with a price to return a higher oscillation than MS equities with significantly lower volatility,” Arnott said. “It is possible that the value stocks of both the UK and the MS are the operations of the decade,” he added.
The United Kingdom has one of the highest COVID-19 death rates: 121,305, according to government data, behind only the United States, Brazil, Mexico and India. The economic impact the pandemic has had on the UK has also been severe, with most of the country in its third close.
Gross domestic product fell 9.9% last year, the worst annual drop since the “Great Ice of 1709.” Along with the pandemic, negotiations over a post-Brexit trade deal came to light, with a deal finally reached on Christmas night. More generally, Brexit has had an impact on UK ratings since the country voted to leave the EU in June 2016, affiliated researchers noted.
UK corporate profits fell 88% in 2020, much stronger than the 17% drop in the US and the 50% drop in Europe. In terms of equity market performance, UK stock fell 15% last year, while growth stocks rose 4%, according to Research Affiliates, which cites data from Russell.
The result of all this is that UK stocks are currently trading at the cheapest quintile of their historical norms, based on average book-to-book price and five-year price ratios.
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In contrast, Arnott said the U.S. equity market has only been more expensive than its current valuation, based on the price-book ratio, one-sixth of the time in the last 60 years and only 8% of the time depending on the price. -Average cash flow ratio at five years.
Cheap valuations can mean buying opportunities or a value trap in which British companies continue to decline, Arnott noted, before concluding in this case that it was the first.
“Neither Brexit nor the COVID-19 pandemic are likely to have almost as much impact in 2026 as 2020-21. Therefore, the market shocks induced by these events represent opportunities now, ”he said.