Time to Snag UK Equities From the Brexit Bargain Bin?

The UK equity market has been a laggard among global peers since Brexit, but bargain-hunting investors have been showing renewed interest. Dina Ting, Franklin Templeton ETFs’ Head of Global Index Portfolio Management, explores the positive trends that are making a case for holding UK equities.

Having endured many plot twists since the United Kingdom voted to leave the European Union (EU) in 2016, the UK stock market has been a notable laggard among global peers.

As of the end of July 2023, US-listed UK mutual funds and exchange-traded funds continued to see year-to-date outflows of US$560 million.1 For the past 12 months through July 31, 2023, UK equity outflows totaled US$1.1 billion, making the market particularly unattractive amid the outperformance of US and European stocks over the same timeframe.2

But with a flagging US stock market, investors are again eyeing the UK’s undervalued and long-unloved market. Outflows have recently slowed in the United Kingdom as investors have been signaling a return of some optimism for the economy’s enticingly cheap investment prospects. Falling energy and stabilizing food prices helped cool Britain’s annualized consumer price inflation rate from June’s 7.9% to July’s 6.8%. While the UK’s inflation rate is still far higher than the Bank of England’s 2% target, we believe its recent downturn could suggest a turning point. The Conservative Government—trailing significantly in polls ahead of a general election expected in late 2024 or early 2025—has made bringing down inflation one of its campaign priorities.

Compelling valuations

Undervalued in absolute terms, relative to their own history and compared to other developed markets, British stocks remain in the bargain bin. In our analysis, they appear particularly cheap against equities in the United States and Japan, whose weightings dominated the FTSE Developed Index at the end of July with 67% and nearly 7%, respectively. The United Kingdom held a 4.3% weighting in the index.3

Corporate fundamentals

The FTSE UK Capped Index’s top holdings—banking and financial services group HSBC Holdings and energy and health care giants Shell, BP, Astrazeneca and GSK—target revenue from foreign customers and sales abroad, which presents investors with the opportunity to gain global exposure without overpaying for it. The index also has slightly more than a 30% weighting to defensive sectors, such as health care and consumer staples, which may help it weather market volatility.4

FTSE UK Percentage of Overseas Sales Ratio Comparison

FTSE 100 Revenue Exposure by Country or Region