With Brexit finally trading and the spread of COVID-19 vaccines continuing at a rapid pace, UK securities could be the ‘trade of the decade’.
This is the opinion of the founder of Research Affiliates Rob Arnott, who said that the end of the threat of COVID-19 is already visible in the United Kingdom, which potentially creates a “real wind” for the economy and the stock market.
A combination of factors, including uncertainty over Brexit and the devastating impact of the pandemic, pushed UK stocks to “incredibly cheap levels” in late 2020, Arnot said, and they remain “remarkably low”.
The country is emerging as an early leader in the spread of vaccination, with 1
The post-Brexit trade deal agreed in December also eliminated many concerns, although some areas, such as financial services, remain unresolved.
“Value around the world is trading at extremely deep discounts on growth. “No matter how we measure valuation, value-added discounts are wider than 95% of the history of the country or region in question – with the exception of Australia,” said analysts led by Arnot.
“The Brexit wind and the rapid vaccination against COVID make the UK’s low rating particularly attractive,” they added.
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In January 2016, research affiliates identified emerging market (EM) stocks as the trade of the decade. Analysts said they still liked the stock of EM value, but that the British stock market and in particular securities are now even cheaper.
“Stocks in the UK stand out as offering one of the most attractive risk-return trade-offs, the price of which is to return a step higher than EM stocks with significantly lower volatility,” Arnott said. “Both value stocks in the UK and EM could be the deals of the decade,” he added.
The United Kingdom has one of the highest casualties of COVID-19 – 121,305, according to government figures – behind only the United States, Brazil, Mexico and India. The economic impact of the pandemic on the United Kingdom is also serious, as most of the country is currently in a third blockade.
Gross domestic product shrank by 9.9% last year, the worst annual decline since the 1709 Great Frost. on Christmas Eve. More generally, Brexit has influenced the UK’s estimates since the country voted to leave the EU in June 2016, the researchers note.
The UK’s corporate profits plummeted by 88% in 2020, much steeper than the 17% decline in the US and the 50% decline in Europe. In terms of stock market performance, UK stocks fell 15% last year, while growth stocks rose 4%, according to Research Affiliates, citing data from Russell.
The result is that UK stocks are currently trading in the cheapest quintile of their historical norms – based on both the price-to-reserve ratio and the average price-to-five-year cash flow ratio.
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In contrast, Arnott said the US stock market was only more expensive than its current estimate, based on price / balance ratio, one-sixth of the time over the past 60 years and only 8% of the time based on price – up to five-year average cash flow ratio.
Cheap valuations could mean either buying opportunities or a value trap in which British companies continue to decline, Arnott said, before concluding that this was the first case.
“Neither Brexit nor the COVID-19 pandemic is likely to have almost as much of an impact in 2026 as in 2020-21. That’s why the market shocks caused by these events are opportunities now, “he said.