The UK equity market has frequently been in the news of late, and mostly for all the wrong reasons.
A recent Goldman Sachs report shed light on the challenges and opportunities that lie ahead for UK stocks, and those that trade them.
The report, published on December 13th, discussed the current state of UK equities and their relationship to the US markets.
Key points in the research note include:
1. Valuation gap: UK equities are trading at a significant discount compared to US equities, with every UK sector showing a double-digit P/E discount to its US counterpart.
Source:Goldman Sachs
2. Shrinking market: The UK equity market is shrinking due to a lack of IPOs and an increase in buybacks and take-privates.
3. International exposure: FTSE 100 companies have significant international revenue exposure, with 29% from North America, higher than UK at 22% or Europe ex-UK 16%.
4. Domestic capital allocation: There's a lack of allocation to UK equities by both institutional investors and UK households. Today around one-third of the UK equity market is owned domestically, compared to a figure of over 80%, in the mid-1990s.
5. Relisting considerations: Some UK companies are considering moving their listings to the US, though this presents challenges simply because these companies could just get lost in a market full of much larger and more familiar stocks to US investors.
6. Performance: At an index level the UK has underperformed the US, World, and some European equity benchmarks.
Source:Goldman Sachs
Not new news
This isn't a new story however, in fact I wrote about this back in August 2023 see this link
The issues in the UK equity markets that I outlined back then, haven't gone away, but neither have the opportunities for traders, as the table below clearly shows us.
The table lists the total returns of the best performing FTSE 100 stocks during 202. Many of those in this list are household names and the returns they have generated wouldn't look out of place in any stock market league tables.
Source: Trustnet
Natwest Group might be viewed as an unexciting UK bank but the chart could hardly be described as dull.
In fact, it’s exactly the type of chart that traders and investors are on the lookout for.
That is, one with a sweeping uptrend, moving from left to right, at approximately 45 degrees, that's largely supported throughout, by the 50-day moving average.
A simple strategy of buying the stock on dips, back to, and below the moving average, would have worked very well. However on reflection so would buying in February, and then trailing a stop loss behind your open position.
Of course it's always easy to trade well in hindsight, but this chart and the price action it contains is a textbook example.
Source: Barchart.com
There is no doubt that the government and regulators need to find a way to reinvigorate the UK equity market, if its long term future is to be secured. It's also true that healthy and well regarded capital markets are the cornerstone of a modern economy, especially one that is reliant on service industries and exports.
However, as traders we can’t directly influence those bigger picture issues, and the structural changes necessary to address them.
What we can do, however, is play the cards we are dealt.
UK companies are cheap and relatively small in size, when compared to US counterparts, which leaves them vulnerable to takeovers from both overseas competitors and Private Equity firms, with billions at their disposal.
Goldman’s believes that UK companies will continue to buy back their own stock, to try and improve their valuations and we can see this trend in the chart below.
Source:Goldman Sachs
These buybacks should provide a “bid “ for UK equities and of course over time it will reduce their supply.
Share prices are, of course, a function of supply and demand, and when supply is constricted in the face of demand prices typically rise .
We recently talked about being tactical when it comes to trading in mainland European equities in 2025 and the same looks likely to be true of the UK market.
US markets will surely grab the lion's share of headlines and media attention in 2025. However, if you could have found 10 stocks that returned at least +49.80% (or more), over the last 12 months, without following the crowd, I think you would be feeling quite happy with your trading as we head into year end.
Worth thinking about?
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