The great British bargain show

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Ethan Wu (0:36)

Pushkin.

It's been a pretty great past year or so for US stocks, but you know what it hasn't been a great year for? UK stocks. As we talked about on the show several times, they've really stunk it up. They tend to move sideways. But the question is, is that a justified discount or an irrational one? Are UK stocks actually a good buy? Today on the show, we discuss.

This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu, back at last for my two-week sojourn in the beautiful island of Taiwan. Joined today by my boss, Robert Armstrong, who has dug in to UK stocks to probably the most fanfare we've ever gotten on an Unhedged newsletter. It's ridiculous.

Robert Armstrong (1:20)

FT readers are really into UK stocks, as it turns out.

Ethan Wu (1:24)

They really are.

Robert Armstrong (1:24)

You know what I'm glad about, Ethan? I'm glad Katie Martin isn't here, because I don't think she'd be able, this is such a hurtful topic to her, the terrible performance of the UK market, that I don't think she'd be able to be objective.

Ethan Wu (1:39)

I think that's right. Katie's a very resilient person, but I think even she wouldn't have the Constitution to talk for 15 minutes about the valuation of UK stocks.

But we are going to, because we, as Americans, have no stake other than bragging rights in this conversation. And you've just written two really interesting columns getting into some of the issues at play in valuing UK stocks. And I think we have to start high level, right?

At a high level, you look at a very simple metric, right? Price to earnings ratio between US markets and UK markets. And on that basis, UK stocks look damn cheap. There's something like a 40 to 50% discount on a PE basis.

Robert Armstrong (2:19)

And we should say, for those of you at home who are not looking at the charts, we're looking at, it wasn't always, they've always been at a discount, but until around 2016, and we will talk shortly about the significance of that timing for those who are not aware of it already, the valuation difference just busted out.

And now you have this huge discount that's been building for five years, which as you say, makes you ask, maybe I own these things. Maybe there's a huge sale in the UK aisle over the stock market.

Ethan Wu (2:56)

And there's another factor too, which is as we've discussed on the show previously with Katie Martin, the UK is a market that likes dividend payers, right? So you combine cheap valuations with pretty chunky dividends at these companies, you're looking at like a 4% dividend yield on the FTSE 100 nearly versus 1% on the S&P 500 So if you're maybe an investor getting up there in age, it can pay you a decent amount of income on your equity holdings.

Robert Armstrong (3:23)

There is a tricky question though.

Ethan Wu (3:25)

Yes, here's the but. Here's the but.

Robert Armstrong (3:26)

But the but question is there's a lot of unequal valuations across stock markets right now. There's a lot of factors as we called them in the business that are trading at discounts. And it's not totally clear that there is a unique discount for the UK alone. So one way to think about this is in terms of just American stocks versus stocks everywhere else. And the last 10 years has just been amazing for America.

So is the UK discount just one example of a kind of global discount? If you look at a chart of the global discount, it doesn't look all that different from the chart of the, maybe less extreme, but it doesn't look all that different from a chart of UK versus USA.

Ethan Wu (4:17)

Yeah, that's right.

There are other factors at play too that could help explain why UK stocks are at a broad discount.

You mentioned US versus ex-US. There's also the fact that the UK is full of smaller companies relative to the US.

Robert Armstrong (4:33)

Yes.

Ethan Wu (4:33)

And also, a lot of those companies tend to be value stocks, which is another category that's been very out of favor.

Robert Armstrong (4:38)