Whenever I talk to my favorite UK equity managers about the Boris Brexit Bounce (the BBB) they tend to frown a bit and say that “most of the bounce has already happened!”. I have my doubts about that caution. My sense is that the BBB, UK PLC bounce has much further to run once we’ve got past the next few months. At the moment we’re still dealing with backward-looking macro-economic numbers that don’t tell the ‘new’ narrative.
The UK market also has a lot of catching up to if comparisons with its bigger, brasher US benchmark peer are anything to go by. The table below – from the beginning of last week – shows relative returns for the FTSE 100 versus the S&P 500. As you can clearly see the UK market has lagged behind markedly. Even a rally of 20% outperformance would only START to narrow the gap with US equities.
|Index level||1 month||3 months||6 months||1 year||2 years||3 years||5 years||6 years|
I’m not the only UK PLC bull – analysts at Jefferies also seem to be still bullish about UK equities. They think that UK equities are “significantly undervalued” with the FTSE 100 now at a 14% discount to the Stoxx 600. Their strategist Sean Darby even sees potential for 20% returns for both the FTSE 250 and FTSE 100.
In particular, they point to continuing UK macro momentum. Their indicators?
- In December, UK banks approved the highest number of mortgages since 2015. UK house prices gained 2% in January and sit at 14m highs. This is all before details of what is likely to be a highly expansionary budget on March 11th.
- In the latest Greed and Fear report by Christopher Wood, Jefferies looks at the survey released last week “which showed the biggest rise in business optimism on record. Thus, the survey of 300 UK manufacturing companies reported that business optimism rose by 67 percentage points from a negative 44% in the three months to October to a positive 23% in the three months to January, the highest level since April 2014 and the biggest increase since the quarterly data series began in 1972 (see Exhibit 7).”
- “The liquidity ratio of non-financial corporates is standing at a multi-year high, suggesting huge potential for an investment cycle. Thus, the liquidity ratio of UK non-financial corporations, measured as the ratio of cash and deposits to loans, rose from 30% at the end of 2018 to a record 55% at the end of 2018 and was 54% in 3Q19.
- “The CBI survey also reported improving investment intentions, with the investment intention indicator for investment in plant and machinery rising from minus 34 in October to 5 in January, the first positive reading since July 2018.
- “Similarly, the latest quarterly Deloitte CFO Survey also reported the biggest increase in business optimism in the 11-year history of the survey. A record net 45.4% of UK CFOs reported that they are more optimistic about the financial prospects for their company than three months ago, up from a negative 35.2% in 3Q19. While a net 10.2% of CFOs expect UK corporates’ capital expenditure to increase over the next 1 months, up from a negative 72.8% in 3Q19”.
- Fund Flow Data suggests the UK remains significant underweight, even after $322m of ETF inflows last week ($2.2bn YTD).
In stock terms, Jefferies highlights five key ideas: Barclays, BT Group. Persimmon, SSE and Tesco. As you might expect me to say (as a non-exec director) I’d also point to Aurora investment trust as my own favorite as well as the Mercantile IT.
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