Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

‘Cheap’ UK equities a hunting ground for bargain seekers

  • 09 December 2020 (5 min read)

For much of the past four years, the UK has been unloved, under-owned and undervalued. Brexit, COVID-19 and out of favour sectors have all conspired against UK equities, which have underperformed their developed market counterparts by around 30%.1

For those with an eye for a bargain, however, the extent of that underperformance now makes the UK an attractive hunting ground. As a result, the UK has seen a significant increase in Mergers & Acquisitions (M&A) activity, with more than 20 takeover approaches worth in excess of £24bn since July 2020,2 including prominent names such as William Hill and TalkTalk.

Why an upturn in takeover approaches?

Quite simply, the UK stock market offers domestic and internationally derived profit and cash generation at a discount to other international stock markets. This discount is true even after adjusting for the sector weightings of the UK market.

Since the outcome of the Brexit referendum result in 2016, UK valuations have de-rated relative to regions such as the US. On a P/E basis, UK shares are cheaper compared to their American counterparts than at any time since the creation of the FTSE 100 with previous troughs followed by sustained outperformance, such witnessed after the Global Financial Crisis or the bursting of the dotcom bubble.

The plethora of M&A deals is a clear signal that people are beginning to take advantage of the opportunity in the UK. For activist investors, private equity and corporate buyers, the UK represents a kind of carry trade, with cheap money raised to buy undervalued companies.

Money waiting on the sidelines

If sentiment towards the UK does start to shift more widely, there is plenty of capital ready to flow back into UK shares. A Bank of America Merrill Lynch survey in July 2019 said 23% of global investors were underweight UK equities, despite the clear valuation opportunity at that time.3  Since this date, the UK market has become comparatively cheaper and ownership has declined further.

Today, UK equities face two near-term catalysts for outperformance – a deal with the EU and a vaccine rollout which would provide clarity on when leisure venues like pubs or restaurants can begin operating more normally. Once this happens, far more investors will want a piece of the UK, driving up the market in the process and creating a virtuous circle as investors start to allocate back to the UK. As the old saying goes, there’s nothing like price to improve sentiment.

How long will UK equities remain cheap?

We don’t expect this valuation discrepancy to last forever. Equity strategists are starting to take note of the M&A activity, together with the valuation anomaly. While many investors may still be wary on the UK, we remain excited about the opportunity set available, particularly given the additional benefits of world leading corporate governance, dependable contract law and title law and company management teams that are permanently accessible.

  • TVNDSSBXb3JsZCAoZ2xvYmFsIGVxdWl0aWVzIHBlcmZvcm1hbmNlKSBhbmQgRlRTRSBBbGwtU2hhcmUgKFVLIHBlcmZvcm1hbmNlKSwgMzAvMTEvMjAyMA==
  • QVhBIElNIGNhbGN1bGF0aW9ucw==
  • QmFuayBvZiBBbWVyaWNhIE1lcnJpbGwgTHluY2gsIEp1bHkgMjAxOQ==

Have our latest insights delivered straight to your inbox

Subscribe to updates.

    Not for Retail distribution

    This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries. 

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. 

    Are you an IFA or other Professional Investor ?

    Are you a financial advisor, institutional, or other professional investor?

    This section is for professional investors only. You need to confirm that you have the required investment knowledge and experience to view this content. This includes understanding the risks associated with investment products, and any other required qualifications according to the rules of your jurisdiction.