Depressed UK stocks could prove rich pickings in 2021

Scott McKenzie, co-manager of the TB Saracen UK Alpha Fund, says UK equity market is still a global pariah and coupled with an ongoing value rotation this creates strong opportunities for investors.

“The changes over the last quarter at a sector level were dramatic. In a nutshell, everything which had previously performed strongly, such as healthcare, technology, staples and utilities began to underperform, whilst previous laggards such as banks, oils and telecoms delivered strong returns from a very low base.  After the recent value rally, it would come as no surprise were the more growth-oriented stocks with fuller valuations to stage a comeback early in 2021.

“However, in the longer-term value still looks very depressed and there are few bigger valuation discounts than the UK market. Despite a strong rally from low levels in the final quarter the UK market remains a pariah in a global context and continues to trade on a huge valuation discount. This means there are potentially rich pickings for UK investors now that Brexit is done.

“It is true some of the discount for UK stocks is warranted as UK indices are dominated by mature sectors such as oils, banks and tobacco and there is little exposure to technology stocks in the main indices. However, this valuation discount permeates across all sectors of the UK, typically leading to lower ratings against global peers in most industries.”

“We remain generally positive on the UK market given the potential for positive earnings revisions from current low levels and improving outlook. We expect a strong pick-up in M&A activity in 2021 as a result of low valuations in the UK, low interest rates and the wall of money in the private equity world looking for a home.”

“We are also beginning to see evidence of a post-COVID-19 recovery in earnings expectations from UK companies. These improved revisions have emerged as corporates report strong recoveries from the low points following the initial lockdown, led by pent-up demand in many cases. This combination of low valuation and improved earnings momentum may prove a potent one in the year ahead.”

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