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Portfolio Discussion: Investing in the UK

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May 08, 2017
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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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