Our Opinion: 2021

Buy British

Britain’s third-quarter GDP figures disappointed. The economy grew by 1.3% between July and September, a sharp deceleration from the 5.5% rise in the second quarter and worse than forecast. Supply chain problems and weak business investment played a role, while the July and August “pingdemic’ held the economy flat before a bounce in September.

GDP is still 2.1% below pre-pandemic levels, worse than most other advanced economies. The recovery is still ticking along. But with headwinds from rising taxes and energy costs, a period of sluggish growth until the middle of 2022 is in prospect.

Things are looking brighter for the FTSE 100. JPMorgan’s analysts have been bearish on Britain in recent years but recently shifted their guidance, telling clients to buy “near-record cheap” British shares. The FTSE 100 could do with a break. London stocks have underperformed the global average every year since 2015. The index has gained 11.5% so far this year, compared with a 27% rally on Wall Street or the 28% gain of France’s CAC 40. Few global investors are excited by London’s stodgy banks and oil companies. Brexit uncertainty and last year’s dividend cuts haven’t helped.

After such a poor run, the MSCI UK index trades on a forward price/earnings (p/e) ratio of just 12, substantially cheaper than a rating of 16 in the eurozone or 22 in America. Overheated global equity markets will run out of steam at some point. When they do there is much less potential downside for British shares than for those elsewhere.

JPMorgan, Barclays and Credit Suisse are more negative on the more domestically- focused FTSE 250 and small caps. The investment banks like British blue chips more than the British economy. About 80% of FTSE 100 revenues come from overseas, while a weakening pound also flatters overseas earnings in sterling terms.

Dividend payouts have rebounded after last year’s disappointments. Attractive company dividends are one of the defining characteristics of the UK stock-market. UK plc is poised to offer an income of some 3.5% over the next 12 months. Try getting that from a savings account.

International investors may finally be deciding that the FTSE’s weaknesses are in the price. Equity bulls looking for a cheap stocking filler for Christmas are betting on Britain.

9th December 2021