Interactive Investor

Cheap UK shares at massive discount to US peers

3rd February 2021 13:30

Graeme Evans from interactive investor

This expert thinks stock markets are in a new multi-year bull market and UK shares are playing catch-up.

Cheap-looking UK stocks were in the spotlight today after a leading broker highlighted the valuation gap between Wall Street and London markets as the widest in three decades.

Liberum's latest research finds that the UK currently trades at a 30.4% discount to the United States, where the S&P 500 and Nasdaq have been at record highs in recent weeks.

The weighting of commodity-related sectors and banks in the FTSE 100 index is well known as one of the primary forces behind this valuation gap, which is the biggest since 1990.

But Liberum also highlights that property and cyclical consumer stocks are much cheaper than their US counterparts and trade at a much larger discount than they historically have done.

This is shown in the FTSE 100 index, which reveals a discount to the S&P 500 of 34.4% against 14.4% for the FTSE 250 index and the Stoxx Europe at a 21.4% discount.

The top flight has come under more selling pressure in recent weeks, falling 6.1% between 7 January and the end of the month, after the discovery of new variants of Covid-19 were accompanied by a row between the UK and EU about vaccine roll-outs.

Despite these developments, Liberum continues to believe that vaccine breakthroughs at the beginning of November have heralded the start of a new multi-year bull market.

The broker said today: “We remain optimistic for stock markets in 2021 and see the current setback as the anticipated short-term corrections that are typical for a nascent bull market.”

The UK-focused FTSE 250, which has been buoyed by the pre-Christmas Brexit agreement, declined by 4% over the final three weeks of January. Liberum added that a look at dividend yields confirms the picture of a FTSE 250 that is expensive relative to the FTSE 100.

Liberum noted that the 2.6% yield of the FTSE 250 is now 35% below that of the FTSE 100 at 4%, the biggest discount in at least 20 years.

The broker continues to prefer small and mid-cap stocks over large caps, however, with its January list of top picks continuing to include Plus500 (LSE:PLUS), Genus (LSE:GNS) and Spirent Communications (LSE:SPT), as well as Cake Box Holdings (LSE:CBOX), real estate investment trust Civitas Social Housing (LSE:CSH), lighting businesses FW Thorpe (LSE:TFW) and Luceco (LSE:LUCE) and metals processor Sylvania Platinum (LSE:SLP).

The list also features pharmaceuticals business PureTech Health (LSE:PRTC), support services stock Smart Metering Systems (LSE:SMS) and technology company STMicroelectronics (NYSE:STM). Its stocks to avoid include Pendragon (LSE:PDG), Rio Tinto (LSE:RIO), Safestore Holdings (LSE:SAFE), Metro Bank (LSE:MTRO) and Dechra Pharmaceuticals (LSE:DPH).

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