Three reasons not to abandon investing in British shares

It seems that investment in british shares The cup of tea has been spilled over them, what they were already missing... With the pessimism thought about British companies, the critical devaluation of the pound and the current political crisis do not bode well for a good future for the United Kingdom. But since we are critical analysts, we think that something good can come out of everything bad. So today we are going to give you three reasons why we should not abandon investing in British shares. 

1. They have a P/E ratio at very low levels

From a valuation perspective, investing in British shares appears to be attractively priced. The ratio P / E The MSCI UK index future has fallen to a record low relative to the MSCI World index. And, as we can see from the chart, it has now fallen well below two standard deviations (dashed lines) from its mean (solid line), and is trading at a discount of close to 40%. This wide deviation makes us believe that the probability of the price returning to its long-term average is very likely. 


MSCI UK 12-month P/E ratio divided by MSCI World 12-month P/E ratio. Source: Artemis Fund Manager.

Unless we do not have a crystal ball, it is impossible to know the bottom of this trend, but investing in British shares helps us tilt the odds more in our favor. With the P/E ratio above the x8,6 level, the valuation of the MSCI UK index is less likely to decline further. That is to say, the forward P/E ratio of the British index is not only cheap compared to its peers, it is also cheap compared to its history over the last 20 years.

2. There are good prospects for share buybacks and foreign acquisitions​

As most investment prices in British shares are undervalued, companies have decided to buy back their own shares, worth almost £51.000 billion (€58.000 billion) this year. And when you are optimistic about investing in stocks, it is not a bad thing to have a big factor in the market that drives up the price of the stock. 


History of share buybacks of British companies. Source: Bloomberg.

Those discounted stock prices could drive another factor as well. An increase in acquisitions of British companies by foreign investors. Combine discounted valuations with sterling weakness and this presents investors with a great long-term investment opportunity. This can generate an additional level of profitability above its valuation.

3. They have dividends with very good profitability

There are two factors that make up the total return on stocks: share appreciation and profitability through dividend payments. We have already talked about the first, and in terms of dividend yield, investing in British shares once again stands out. The FTSE 100 offers us a return of 4,1%, much higher than investing in shares of other developed economies. There are two factors that suggest these returns will continue even as recession fears grow and earnings headwinds blow: The FTSE 100 generates 70% of its revenue overseas, and the weakness of the pound tells us that Foreign investors' profits are worth even more when they return home. The dividend payout ratio has already been adjusted considerably downwards, as it is at a low of around 50%, compared to its previous high of 70%.


Dividend yields in major developed markets. Source: JPMorgan.

How do we take advantage of this stock investment opportunity?

We have two ways to take advantage of this investment opportunity in British shares. The first would be to buy the weakened 100 FTSE (the index most focused on large companies) and selling the overvalued 250 FTSE (the most country-focused index). In this way we hedge the market and we can obtain profits whether the market rises, falls or sideways. 


The second would be to invest directly in the FTSE 100 by buying the iShares Core FTSE 100 UCITS ETF (ISF). Investment prices in shares in the UK housebuilder sector are undervalued, trading at a discount of approximately 45% to the FTSE 100. It is important to remember that this sector is also sensitive to market expectations. the interest rates of Bank of England (BoE).


Therefore, if the BoE adopts fewer increases than investors expect or if there is a softer landing in the property market, we could see a sharp price rise in investment in housebuilder shares, such as Persimmon (PSN), Vistry Group (VTY), Crest Nicholson (CRST) and Barratt Developments (BDEV).


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