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UK Equities: Global growth at a discount

Quick takes on capital markets

May 9, 2024 | 2 min read
Scott Leiberton, CFA
Managing Director, Client Portfolio Manager

After years of lackluster performance, UK stocks now trade near their lowest relative valuations in modern history. However, despite local economic weakness, many of the UK’s leading companies are multinational, and derive the majority of their revenues from offshore sales—presenting an opportunity for active investors to tap into the robust global growth potential of these discounted UK multinationals.

UK price/earnings relative to the world
MSCI United Kingdom Index PE divided by MSCI World Index PE, 2004–present

UK price to earnings relative to the rest of the world, since 2004.
Source: Factset, MCSI, Principal Asset Management. Data as of December 31, 2023.

Over the past 20 years, the weight of U.K. stocks as a share of the global equity market has slid by more than two-thirds, now standing at less than 4%. The 2016 Brexit referendum only worsened the UK's equity position, and since, broad market returns have significantly lagged global peers. With a weakening currency, complex pension framework, and stamp taxes on trading frustrating local and foreign investors and further discouraging equity exposure, the challenged backdrop has even inspired some U.K. companies to relist their shares in the U.S.

However, despite this cautionary macro backdrop, the UK remains home to many of the world's most competitive global multinational companies that conduct significant business outside the UK. In fact, among the largest 100 UK-listed companies, over 70% of their total revenues are derived from foreign sales.

Amidst the indiscriminate outflows, particularly from passive funds, there are multinational leaders in the UK that can offer access to robust global growth opportunities. Importantly, these companies are trading at historic valuation discounts, presenting a potential opportunity for investors. Furthermore, the weakness in exchange rates has enhanced the export pricing competitiveness of many of these companies, adding to their appeal.

For investors, active management could be key to navigating and capitalizing on these unique opportunities. The current landscape offers a chance to unlock value among strong multinational companies, making this a compelling time to consider select U.K. equities within international/global equity portfolios.

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