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What Next for the UK Stock Market?

Politically, the UK is in turmoil, and the economic outlook is being downgraded. But, says Mark Preskett, this does not mean investors should write off domestic stocks

Mark Preskett 9 November, 2017 | 12:11PM

 

Mark Preskett: Financial markets are following the Brexit negotiations extremely closely and there is understandably a deep sense of nervousness on this subject among UK investors.

While the economic relationship with the UK’s largest trading partner is unclear, we have actually been growing more positive on UK equities.

The first thing to say is the UK economy is not the UK equity market. 70% of the FTSE’s earnings come from overseas, so a weaker sterling is a clear tailwind for many of our international facing large-caps.

Investors are also nervous of a weaker pound. In a no-deal scenario, this may come to pass, but using a simple PPP valuation metric, sterling is oversold in our opinion having fallen 20% against the US dollar over the past two years.

But the key reasons we are positive on UK equities are valuations and earnings reversion.

Earnings per share is an indicator of a stock’s profitability and at the index level, UK EPS has been falling steadily for nearly five years. A lot of this is wrapped up in the commodity price weakness affecting our large energy and mining companies, and struggling banking sector. But it is interesting to see that EPS in 2017 is showing its first meaningful growth since 2011.

Finally, wrapped up with this EPS growth is our belief that the UK market is now reasonable, especially when compared to other developed markets like the US. And as long-term valuation driven investors, we have been buyers of UK equities not sellers.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Mark Preskett  is a Senior Investment Consultant & Portfolio Manager for Morningstar UK