Stocks to own as UK cheapest vs US in over 30 years

UK shares, including FTSE 100 stocks, trade at a huge discount to US and European peers. This expert explains how to take advantage and reveals their 10 top picks this month.

The valuation appeal of London-listed shares has been highlighted after a City broker said UK equities are trading at their largest discount relative to the US in three decades.

Adjusted for sector differences and excluding pandemic-led positions in October 2020, Liberum said the UK discount widened in October to 30.3% versus Wall Street equities and to 25.2% against European equities.

The US gap is now the largest in 32 years and has been driven by energy, financials, materials and real estate in the UK being on discounts of 40-50% versus their US peers. The normal level for these sectors is a 10-20% discount, prompting Liberum to comment that “we have never seen such value opportunities in the UK versus the US”.

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Leisure, media and industrial stocks in the UK are regarded as expensive relative to their 15-year history.

The FTSE 100 is the cheapest index in Liberum’s coverage based on 9.1 times forward earnings. However, it points out that much of this valuation advantage is driven by energy companies and their high expected earnings, which the broker believes are difficult to achieve.

The FTSE 250 index, which has fallen by more than 20% this year, is on 10.5 times 2023 earnings compared with Stoxx 600 Europe at 11.3 times and the S&P 500 at 16.7 times. The FTSE 250 multiple is down from 12.4 times 2022 forecasts, but Liberum believes that earnings growth expectations among mid-cap stocks still appear too optimistic.

The forward dividend yields for the FTSE 100 and FTSE 250 are 4.5% and 4% respectively, whereas the Stoxx Europe offers 3.9% and the S&P 500 1.8%.

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Liberum’s top 10 picks for this month include Glencore (LSE:GLEN), which currently trades on 5.3 times forward earnings and whose shares are seen as having the potential to reach 685p.

The broker said: “Glencore has the best commodity mix of the majors with significant exposure to thermal coal and none to iron ore.

“The marketing business has probably had one of its best ever years given the strength and volatility in commodity prices.” In contrast, Liberum has “sell” recommendations for Chilean copper miner Antofagasta (LSE:ANTO) and iron ore giant Rio Tinto (LSE:RIO).

Its most preferred list also includes shipping services firm Clarkson (LSE:CKN), which trades on 15.5 times forward earnings and has a price target of 4,750p.

Liberum said: “Shipping market conditions are broadly supportive, with signs of the long-awaited rebalancing of demand and supply in most shipping segments coming through. Clarkson is well-positioned to exploit this structural market recovery.”

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Warehouse firm Segro (LSE:SGRO) and storage business Big Yellow Group (LSE:BYG) are two picks from real estate, with targets of 1,135p and 1,490p respectively, while the City firm also likes support services business Serco (LSE:SRP) after recent strong half-year results.

XPS Pensions Group (LSE:XPS) and Plus500 Ltd (LSE:PLUS) from financial services, support services business FRP Advisory, the closed end fund RRenewables Infrastructure Group (LSE:TRIG) and bus and rail operator FirstGroup (LSE:FGP), make up the list.

Liberum’s price target on FirstGroup remains unchanged at 165p, despite having to cut its current year estimates in the wake of today’s interim results.

The downgrades relate to the bus division, where driver shortages and cost inflation are among factors resulting in a slower than expected pandemic recovery. Liberum analyst Gerald Khoo said: “A more robust approach to underperforming capacity should see margins improve, although the full effects will not be evident until next year.”