UK equities are valued at “deep discounts” compared with historical averages and international peers, according to J O Hambro’s UK profit index.
This is due to both low valuations and portfolio managers’ low weightings to UK stocks, according to the report.
This means that UK stocks are about a quarter and one seventh cheaper than US and European stocks, based on the price to earnings ratio.
J O Hambro added that it expects an “unprecedented” recovery in UK company profits in “both scale and speed” in the next year. The firm estimates that UK plc earnings will double to £110bn in the 12 months to March 2022.
James Lowen and Clive Beagles, senior fund managers of the firm's UK Equity Income Fund, said the change of mood in company boardrooms was “palpable” at present.
“The rebound from the Covid-19 recession, the economic support from the Bank of England and the Treasury, and a sense of clarity about what Brexit finally means, have unleashed an appetite to capitalise on the upswing by focussing on what management teams can do better,” they said.
The pair added they were particularly keen on commodities, “which are benefiting from both the short-term cyclical upturn and the long-term hunger for metals that support the green energy revolution.
“These, along with financials, construction, consumer discretionary stocks and a few global cyclicals, like WPP, are core holdings in our fund.”
The report highlights the damage done by the pandemic to UK revenues, which dropped by 19 per cent, or £349bn, in the twelve months to March this year. Profits also fell substantially, by 61 per cent, in the same period.
The impact on UK firms was eight times bigger than that of the global financial crisis in 2007-08, according to the report.
Indeed, investors have continued to flee out of UK equity funds in the past few months with around £1bn withdrawn from UK large-cap and equity-income funds in April, according to data from Morningstar.
The recovery might also aid the return of dividends, which all but disappeared in the pandemic and might not recover fully until 2025 according to Adrian Gosden, investment director at Global Asset Management.
“We will not get to the 2019 dividends in the next four years,” he said at the firm’s UK equity income webinar on June 15.
“There were some companies in the United Kingdom that were over-distributing, so they were paying probably too much in dividends [before the pandemic].”
He added although the cyclical sectors, such as logistics and construction, were already starting to rebound, financial services firms would recover fastest.