Investors neglected UK equities in recent years, as they barely trade above post-pandemic levels. In contrast, the US stock market rallied in response to the fiscal and monetary stimulus provided by the authorities in the United States.
But 2023 sees US equities stalling. For example, the Dow Jones index is almost flat, up +0.61% YTD.
So where should investors turn their attention to? One place is Japan, as I wrote in this article here, where economic growth and a weak currency attract foreign investors in the local stock market.
Could the UK be the next one? Here are three reasons to buy UK equities:
- They are extremely cheap
- Recent UK wage data does not warrant more hikes from the Bank of England
- FTSE 100 trades above major support area
Close to record cheapness for UK equities when compared to US
It had almost never been a good time to buy UK equities if we look at valuations. They appear so cheap when compared to the US, and approach close to record levels.
In fact, almost all UK industries trade at a discount to US peers. For example, the transport industry trades at a -35% discount. Or, the real estate, at a -50% discount.
UK wage data hints at no more hikes from the Bank of England
One may argue that the Bank of England’s monetary policy is responsible for keeping investors away from the stock market. But the Bank of England simply followed what the Fed did in the United States, as inflation is higher in the UK, too (even higher than in the United States).
If that is not an issue, then recent data suggests that wage growth is slowing in the UK. Hence, the Bank of England may build a case for pausing the rate hikes – just like the Fed hinted.
FTSE 100 trades at a major support area
Besides the fundamental arguments, the technical picture also points to more gains for UK equities. FTSE 100 trades at a major support area, an area that it had difficulties overcoming for over two years.
All in all, UK equities look cheap by all measures. Should investors regain confidence in the kingdom’s economy, there is more upside potential than downside.