Is It The Right Time For Value Investors To Invest In The UK Stock Market?

  • Jun 12, 2019 BST
  • Team Kalkine
Is It The Right Time For Value Investors To Invest In The UK Stock Market?

We are already sitting in the mid of 2019 and thinking that investing in the current market scenario looks very different than it was 12 months ago. Last year, this time, global equity markets were up trending, investors sentiment towards the market was high, and we witnessed the FTSE 100 index registered an all-time high of 7,903 on May-22-2018. At the closing (as on June 11, 2019), London's broader index is nearly 7% off those highs. In the present scenario, uncertainty has ramped up, benchmark indices are falling, volatility has risen, and investors' confidence has been jolted.

Intelligent investor

As legendary investor Warren Buffet said that “Be fearful when others are greedy and be greedy when others are fearful.” However, this strategy of Warren Buffet has proven right for the value investors time and again.

As an equity analyst, I believe for value investors, and current market condition could provide great opportunities to buy on the dip. Several fundamentally decent scripts are trading at a lower price than they were a year-ago period and yet many have higher dividend yield. I think this is a positive indicator for those who have a long-term investment horizon.

UK stocks vs US stocks

If you see from the valuation standpoint, broader indices in the United States are trading at higher valuation with lower dividend yield than the UK’s indices. For instance, S&P 500 Index, a market capitalisation weighted index of 500 large companies, having common shares listed on New York Stock Exchange (NYSE), is trading at Price-to-Earnings ratio of approximately 20.4x, with the dividend yield of 2.44%. On the other side, the FTSE 100 index, a market index of 100 large public companies in terms of market capitalisation, having common shares listed on the London Stock Exchange, is trading at a Price-to-Earnings ratio of approximately 14.5x with a dividend yield of 4.48%.

Since the Brexit referendum announcement made on June 23, 2016, the FTSE 100 index has delivered a price return of approximately 16% in absolute terms, whereas S&P 500 has delivered a price return of approximately 37% in absolute terms. And also compounded average growth rate (CAGR) of FTSE 100 index since the date of referendum result announced, stood at approximately 5% against the CAGR return of approximately 11% delivered by the S&P 500 index during the period under review. This indicates, among the developed markets, UK Indices were laggards against their peer indices and many globally diversified companies are available at the lower price.

From the Income Investors point of view

We saw that the dividend yield of the FTSE 100 index stood at 4.4% approximately, whereas dividend yield of the S&P 500 index stood at 2.4%. So how is FTSE 100 index offering value for the income investors against their peer Indices globally?

At the closing (as on June 10, 2019), the FTSE 100's dividend yield was approximately 2.07x of the 10-year US Bond Yield and approximately 5.2x of the 10-year UK bond yield. This reflects that, it could generate higher income for the investors against the fixed income opportunities available in the market. It is a single, very strong measure for those who follow the income investment strategy to manage their portfolio and also for the value investors.

Also, one important factor that investors must consider is that the majority of FTSE 100 and FTSE 250 companies earn a large portion of their revenue from the global market, not only from the UK, so they are more global stocks or companies. Therefore, if you go and buy their stocks at such a lower price, you are not buying UK stocks at a cheaper price, else you are buying the global stocks at a cheaper price or valuation. As we discussed earlier, the UK market is offering a lot of good buying opportunities at a lower valuation with high dividend yield as compared to the other developed market.

Given the potential uncertainties that investors are witnessing ranging from, Brexit, trade quarrel between China and USA and fear of global growth meltdown, it is easy to understand why investors have halted their investment. But, as I believe there are still plenty of defensive stocks available in the market, which you can add to your investment portfolio. For instance, Barclays Plc (BARC), GlaxoSmithKline Plc (GSK), Rio Tinto Plc (RIO) and Burford Capital (BUR) are some of the popular defensive stocks, and Brexit impact would be lesser on these companies.

Barclays Plc (BARC)

Barclays Plc (BARC) is a global financial services provider offering personal and business banking, wholesale and commercial banking, and private and investment banking solutions to individuals, SMEs, corporates, and high-net-worth clients. It offers deposits and accounts, cards, loans, and investment solutions. The company is investing heavily in technology development across the group. As a part of the development process, the company is more focussed on digitising its consumer business in the UK, US and Germany. Adequate Capital, Cost efficiency, Adequate liquidity and Asset quality makes Barclays attractive at the current market price.

GlaxoSmithKline Plc (GSK)

GlaxoSmithKline Plc (GSK.L) is a healthcare company, which focuses on the manufacture, commercialisation, and development of pharmaceuticals vaccines and consumer healthcare products. It offers drugs for the treatment of cancer, HIV, anti-viral, metabolic, anti-bacterial, rare diseases, cardiovascular and urogenital, immuno-inflammation, respiratory, central nervous system (CNS), and dermatology. GlaxoSmith is a giant pharmaceutical and consumer healthcare company with strong fundamentals and growth prospects. The company has relatively high margins compared with its peers operating within the same business.

RIO Tinto (RIO)

Rio Tinto Plc (RIO) is a leading mining and metal company listed on the London Stock Exchange. Its area of operations categorised into three segments: finding, mining, and processing mineral resources. Rio Tinto is a globally renowned leader in Aluminium, one of the world's most omnipresent metals. The dividend yield of the company stood at 4.97% which is marginally above the dividend yield of the FTSE 100 index.

Burford Capital (BUR)

Burford Capital Ltd (BUR) is the provider of funds and investment management services to the legal market. The company is a market leader with the world’s most experienced, transparent and well-capitalized finance provider and is focused on law. As a part of the growth plan, the company had arranged a record-breaking amount of new investment capital in the current financial year. The company’s new sovereign wealth fund will improve the return on equity in the future. Burford Capital Ltd is continuously investing to grow its operations and planning to expand its product offerings in the near future.

Conclusion

However, the fog of Brexit is still hovering over Britain, but recent data which were revealed by the Office for National Statistics (ONS) whether it was related to employment, wage or GDP growth has shown positive trends, and many are expecting that the markets have already discounted the potential Brexit headwinds.

Therefore, the bottom line is that investment in the UK market may have its uncertainties, but several lucrative opportunities are still available in the market. The above-mentioned stocks, which, in our opinion, at their current trading levels are defensive buys and having decent potential to move up and protect investors' portfolio against the noise of Brexit.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

Amidst this, are you getting worried about these falling interest rates and wondering where to put your money?

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