UK Stocks Look ‘Cheap’ With Rishi Sunak Taking Over As Prime Minister

While markets welcomed the news, the recent political turmoil in Britain has weighed on stocks and bonds. Tim Craighead and Laurent Douillet of Bloomberg Intelligence note that the FTSE 100 headline index is trading on a price to forward earnings (P/E) multiple of around 8.7 times. That is below its lowest point during the pandemic — and is comparable to troughs in 2008 and 2011.

The index looks cheap relative to other markets too. In terms of valuation, the FTSE 100 trades at a discount of around 20% compared to euro-area stocks (as measured by the Stoxx 600 index), and 45% compared to the S&P 500. Both these measures are roughly “two standard deviations below 10-year averages,” according to Craighead and Douillet. Putting that into plain English:  This sort of thing doesn’t happen very often. 

There are good reasons for the FTSE 100 to be cheap, according to Bloomberg Intelligence. For one thing, it’s stuffed with resources stocks, whose multiples have compressed as earnings have risen, due to their cyclical nature. Beyond that, the FTSE 100 is generally weighted toward sectors that trade on low price-to-earnings because their growth prospects are not that exciting.  

However, there's no question that even accounting for the index's limitations, it remains inexpensive compared to history. And there’s another factor to consider. As my colleague Abhishek Vishnoi reported last week, several analysts are arguing that the weak pound is making UK-listed stocks particularly attractive to opportunistic overseas buyers. Put simply, if you’re a buyer armed with US dollars, you have an added discount on top of the fact that UK stocks are already trading at fairly modest valuations. 

If you’re worried about “catalysts” that might result in markets finally waking up to some of the in the UK, then here’s something to ponder. Let’s say we are now entering a period of relative political calm for the UK. Throw in some hints that the Federal Reserve might be thinking about slowing the pace of interest rate hikes. Suddenly, the most obvious direction for the pound might no longer be down. 

In turn, that might light a fire under those hoping to take advantage of their currency discount on UK assets.  

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