Who would buy ‘dying’ UK stocks? I would!

This week, I have read many articles claiming that the UK stock market is ‘dead’. In the middle of much hand-wringing, financial experts claim that London Stock Exchange is a graveyard for unloved and unwanted UK stocks. I do not agree!

UK stocks fell from grace

Among global investors, UK stocks have become less important this century. In 2000, the UK stock market accounted for a tenth of the global value of the stock market. Today, that proportion has fallen to 4%.

Furthermore, the number of companies listed in London is decreasing. In January 2015, 2,429 UK shares were listed in London. By January 2023, this total had dropped to 1,945, with the trend continuing downward.

What happened?

First, many companies choose to list in New York rather than in London. In the US, stock valuations are consistently higher, markets are deeper and more numerous, and liquidity (the ease of trading stocks) is superior.

Not surprising, as the US market is huge. In total, US stocks are worth more than $40trn today, compared to $2.5trn for UK stocks. In other words, the US market is 16 times larger than London, giving companies access to a pool of investors and liquid capital.

Second, the London market has been described as a ‘graveyard’ or ‘museum’ of heritage, old world companies and underdeveloped businesses. Meanwhile, the US is seen as at A place for innovative, fast-growing, loss-making growth companies (especially technology companies).

The third reason for London’s ‘de-equitization’ is corporate takeovers and share buybacks. In the past three years, too many quality UK-registered businesses have fallen to take over bids from foreign investors. Meanwhile, many UK companies are using their cash flow to buy back shares, shrinking their share base even further.

The fourth reason is the Brexit vote to leave the European Union in mid-2016. While in the EU, the UK can trade freely with 450m other Europeans. Today Britain is seen by some as an insular island of 68 million people with high taxes and heavy corporate regulations.

Fifth, executive pay is higher in the US, which is good for company bosses, right?

Doom, gloom … and boom?

For me, UK stocks are probably as unpopular and unpopular as they have been in 55 years. As a result, they are trading at modest ratings today.

For example, in FTSE 100 the index trades at a price-to-earnings ratio of around 12 and yields 8.3%. In addition, it offers a dividend yield of about 3.8% per annum, covered about 2.2 times by earnings. To me, this seems very cheap, both historically and geographically.

Of course, I accept a lot of FUD (fear, uncertainty and doubt) surrounding the UK economy and the risk of recession. However, as a veteran value investor, I am drawn to low value/dividend/income stocks. And I see many large companies trading at low valuations in the FTSE 100 and FTSE 250 index.

As a result, starting at the end of 2021, my wife and I have reduced our exposure to expensive US stocks and increased our exposure to cheap UK stocks. Indeed, when I look at the Footsie today, I see a range of undervalued UK stocks in sectors including banking & finance, energy, mining and telecoms.