Is now the time to spend money on the UK?

Currently, UK equities are cheap compared to their foreign counterparts. But with potential takeover activity on the horizon, and growth back on the cards, it appears the tide might be beginning to shift.

In recent years, the UK market has been struggling to keep up with its competitors and has suffered due to its lack of high-quality tech stocks as US-based firms have seen meteoric gains.

As a result, UK equities are considerably cheaper than those in the US or Europe, and at the same time are delivering higher dividends and operating in a faster growing economy.

On the rise: Cheap UK equities could be set to grow in value as the economy stabilises

Richard Hunter, head of markets at Interactive Investor, said: ‘The FTSE 100 has tended to languish over recent years, not least of which was due to the fallout from Brexit and the index’s relatively low exposure to the technology sector, which has latterly been “the” trade which investors chase.

‘However, there are some signs that fortunes could be on the turn.’

Last month, the Bank of England cut interest rates for the first time in 2024 to five per cent and is expected to make further cuts before the year is out. 

In comparison, the US has yet to see a rate cut, though this could be on the cards for the looming Fed decision.

The UK has also delivered strong growth in 2024 so far, with GDP having risen by 0.7 per cent in the first quarter and 0.6 per cent in the second, compared to 0.3 per cent and 0.2 per cent growth for the eurozone and 0.4 per cent and 0.7 per cent growth for the US.

‘The signs are the UK economy is set to keep growing,’ Tom Stevenson, investment director at Fidelity, said. 

‘In July, the IMF upgraded its forecast for UK growth in 2024 from 0.5 per cent to 0.7 per cent, while sticking with its forecast that the economy will expand by 1.5 per cent next year. 

‘Meanwhile, Britain’s new Labour government says it has put growth at the centre of its economic agenda.

‘Moreover, the UK is now underpinned by several factors including more growth and the actual onset of falling interest rates. 

‘That could fuel a further unwinding of the discount that’s been applied to UK shares ever since the Brexit referendum in 2016.’

While the UK market is increasing in value, data from Fidelity shows it remains at a considerable discount. 

The UK stock market has a price to earnings ratio of 11.7, far lower than 21.0 for the US and Canada, and 14.1 for Europe (excluding the UK).

Price to earnings ratios indicate the value of a company’s share relative to its earnings. 

Often companies with low ratios are considered to be value stocks.

Stevenson said: ‘The UK stock market is no longer trading in absolute bargain territory – but it is pretty close to it. 

‘Valuations in the US – even after the hiatus in markets mid-summer – remain close to their recent peaks.’

With UK equities still trading at a marked discount to those elsewhere, they are becoming increasingly attractive prospects for potential buyers.

‘Evidence of the market’s attractive valuation and newfound political stability comes from the number of foreign takeovers we’ve seen so far this year. 

‘Indeed, the value of bids for UK companies hit its highest since 2018 earlier this year,’ Stevenson said.

Cyber-security firm Darktrace and packaging company DS Smith have both seen high-profile bids this year, with Rupert Murdoch’s REA group now mulling a bid for Rightmove.

Added to this, the Government has pledged to promote new investment in the UK, both through a £7.3billion national wealth fund, as well as considering reducing regulation and axing stamp duty in order to make the UK a more attractive prospect.

Hunter said: ‘The possibility of luring pension funds back to the UK in a meaningful way is another intriguing possibility which would immediately bolster prospects.’

He added: ‘For the longer term the UK remains an investment destination full of quality and proven names, and while the returns can be lower than some other indices, the potential rewards coming from many well-regarded names is evident and may be increasingly coming to the attention of overseas investors looking for an alternative outlet.’