Portfolio Discussion: Investing in the UK

Read our UK insights to share with your clients using Guide to the Markets charts.

Go to the profile of Mike Bell
May 08, 2017

The referendum result has created great political and economic uncertainty for the UK. The outcome of the negotiations with the European Union will have a large effect on the future of the UK, the value of the pound and the relative performance of different sectors.

Domestic vs international exposure, large vs small?

  • The large cap FTSE100 gets most of its revenues from abroad whereas the mid cap FTSE250 has a larger exposure to the domestic UK economy. Therefore a fall in the pound should favour internationally exposed large cap stocks whereas a rise in the pound should favour smaller more domestically focused stocks.
  • After many years of outperformance mid-cap stocks look somewhat expensive relative to large cap stocks.
  • Large cap earnings are also coming from a lower base, suggesting more potential upside than already elevated FTSE250 earnings expectations.

Guide to the Markets - UK, page 45

Attractive income and commodity exposure

  • In a world where income is still hard to come by, UK equities offer a very attractive dividend yield relative to other equity markets.
  • Earnings expectations for UK-listed companies collapsed for five years, driven mainly by the fall in commodity prices. As commodity prices rebound, earnings expectations are improving.
  • UK equities stand to benefit more than most other developed markets from any further improvement in commodity prices.

Guide to the Markets - UK, page 44

UK valuations are relatively attractive

  • UK equities are neither cheap nor expensive relative to their historical average price-to-earnings (P/E) ratio, but relative to government bonds the dividend yield available on UK equities still looks very attractive.
  • UK earnings have plenty of room for recovery after their poor performance in recent years. As a result, the cyclically-adjusted P/E, which takes into account the position in the earnings cycle, leaves UK equities looking very cheap relative to their long-term average.

Guide to the Markets - UK, page 46

Investment implications

  • Weaker sterling, combined with undemanding cyclically adjusted valuations and a high dividend yield, could provide support for UK equities.
  • Large cap equities are less exposed to potential domestic economic weakness than mid and small cap companies.
  • That said, the uncertainty created by the Brexit negotiations argues for taking relatively small active sector and size bets relative to the benchmark.

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Go to the profile of Mike Bell

Mike Bell

Market Strategist, J.P. Morgan Asset Management

Michael Bell is a global market strategist within J.P. Morgan Asset Management's Global Market Insights Strategy Team. He is responsible for communicating the latest market and economic views in the UK and around Europe.


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John 6 months ago

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John 6 months ago