As the Brexit trade deal is finally finalized and the COVID-19 vaccine continues at a rapid pace, British value stocks could be ‘the trade of the decade’.
This is the view of Research Affiliates founder Rob Arnott, who said that the end of the COVID-19 threat is now in sight in the UK, which could potentially be a ‘real headwind’ for its economy and stock market. create.
A combination of factors, including the uncertainty surrounding Brexit and the devastating impact of the pandemic, pushed British value stocks to ‘improbably cheap levels’ by the end of 2020, and Arnott said it remained ‘remarkably low’.
The country emerged as an early leader in vaccination, with 17.9 million people – about a third of the population – already receiving at least one dose. The government hopes to vaccinate every adult by the end of July. It also excluded his roadmap, with the aim of lifting all restrictions by 21 June
The post-Brexit trade agreement, which was agreed in December, also allayed many concerns, although some areas, such as financial services, were not resolved.
‘Globally, the value is trading at extremely deep discounts relative to growth. “No matter how we measure valuation, value-to-growth discounts are wider than 95% of each country’s or region’s history – except in Australia,” said analysts led by Arnott.
“The tailwind of Brexit and the rapid vaccination of COVID make the low valuation of the UK particularly attractive,” they added.
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In January 2016, Research Affiliates cites stocks as emerging markets as trading in the decade. Analysts have said they still like EM value stocks, but that the UK stock market and especially value stocks are now even cheaper.
Source: research subsidiary companies using data from CRSP / Compustat and Worldscope / Datastream
“UK equities are on the verge of offering one of the most attractive trade-offs between returns and returns, with a price higher than EM equities with significantly lower volatility,” Arnott said. “Both UK and EM value stocks may appear to be the industries of the decade,” he added.
The UK has one of the highest COVID-19 mortality rates – according to government data – 121,305, just behind the US, Brazil, Mexico and India. The economic impact that the pandemic had on the UK was also severe, and most of the country is currently locked up for the third time.
Gross domestic product shrank by 9.9% last year, the worst annual decline since the ‘Great Fridge of 1709’. Along with the pandemic, negotiations on a trade deal slowed down after Brexit, with an agreement finally reached on Christmas Eve. Broadly speaking, Brexit has had an impact on UK valuations since the country voted to leave the EU in June 2016, Research Affiliates noted.
UK corporate earnings fell by 88% in 2020, much steeper than the 17% drop in the US and the 50% drop in Europe. In terms of stock market performance, UK value stocks fell 15% last year, while growth stocks rose 4%, Research Affiliates said, citing Russell data.
The bottom line is that UK equities are currently trading in the cheapest quintile of their historical norms – based on both the price-to-book and price-to-five-year average cash flow ratios.
Read: Mining stocks rise in a struggling UK market
In contrast, Arnott said the U.S. stock market was only more expensive than the current valuation, based on price-to-book ratio, a sixth of the time over the past 60 years, and only 8% of the time based on average price to five-year cash flow ratio.
Cheap valuations can mean buying opportunities or a fall in value in which British companies continue to decline, Arnott noted before reaching a conclusion in this case.
“Neither the Brexit nor the COVID-19 pandemic will probably have almost as much impact in 2026 as in 2020-21. That is why the market shocks caused by these events are now opportunities, ”he said.