Morgan Stanley says it's time to invest in the UK — and names its favorite stocks

Published Mon, Jul 19 202112:43 AM EDT

LONDON — U.K. stocks looks cheap compared to their global peers, according to Morgan Stanley, who gave a number of reasons why it's where investors should be putting their money right now. In a note earlier this month, Morgan Stanley equity strategists gave six reasons why it might be time for investors to reconsider the often unloved U.K. UK leading the way in M & A The U.K. has seen its merger and acquisitions activity accelerate faster than in the U.S., Europe and Japan in 2021. Over the last 12 months, U.K. M & A deals as a percentage of market capitalization have hit 12%, the highest level since 2001, according to Refinitiv data. "Although equity investors appear to have limited appetite for buying into the listed UK equity market, private equity investors seem to have fewer qualms with the industry accounting for 30% of all UK acquisitions by value over the last year — a level of engagement that is high relative to historic trends," the Morgan Stanley strategists said in a note dated July 9. UK is the cheapest global stock market An explanation for higher M & A activity in the U.K., is the fact that corporate assets are "materially cheaper" than in many other countries, Morgan Stanley's strategists explained. They said that the U.K. is the cheapest major global market by some distance with a price-to-earnings ratio of 13 times for the next 12 months. By comparison, the global MSCI ACWI index has a price-to-earnings ratio of 19 times. A price-to-earnings ratio is an important metric used by traders to gauge whether a stock is under or overvalued. Morgan Stanley's strategists found a number of U.K. stocks that looked cheap versus their global peers, picking out some they had given an "overweight" rating. These included chemicals firm Johnson Matthey , grocery store chain Tesco , oil major Shell , broadcaster ITV , information and analytics company RELX and aerospace company BAE Systems . The pound has halved in value Since 1966, when England's soccer team won the World Cup, the pound has halved in value versus the U.S. dollar and has fallen more than 80% against the euro. On the one hand, a falling pound means it is cheaper to hold the currency. But if the pound continues to fall, that would typically be good for many of the largest companies listed in the U.K. which generate most of their earnings overseas. "The last 54 years haven't been particularly kind to the England football team, and it's a similar story for the international value of UK financial assets (yes we are cognisant that England is not the UK, but we're rolling with it anyway!)," Morgan Stanley's equity strategists said. Meanwhile, the U.K.'s FTSE All-Share stock index has risen more than 4,000% in that time but it has stagnated over the past few years. As of when Morgan Stanley published its note on Friday, the FTSE All-Share was down 5% since its peak in May 2018, while Europe's STOXX50 was up 14% and the S & P 500 gained 60% during that period. UK stocks performing better 'beneath the surface' After years of underperformance, it appears the U.K. stock market's relative performance is starting to stabilize, Morgan Stanley's strategists said. They said that the U.K. had just seen its best nine-month period of relative performance to the MSCI ACWI in a decade. In addition, the average U.K. stock has been the second-best performer year-to-date, second only to the median U.S. stock. UK smaller stocks beating large companies The U.K.'s FTSE Small Cap index has doubled its performance since a low last year and is up 60% over the last five years. By comparison, the FTSE 100, the U.K.'s blue-chip index, has underperformed the smaller companies index by over 40% in the last 12 months and has been broadly flat over the past five years. Italian small-caps are the only group of stocks to keep pace with U.K. firms year-to-date, with both up by more than 20%. UK earnings growth Estimates have suggested that the MSCI U.K. stock index is set to see earnings per share, which indicates company profit growth, climb by 65% in 2021. The U.K. "looks set to post a faster earnings rebound than any other major global country/region this year," Morgan Stanley's strategists said. However, they pointed out that 34% of the U.K. stock market's earnings per share is expected to come from oil and mining companies.

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LONDON — U.K. stocks looks cheap compared to their global peers, according to Morgan Stanley, who gave a number of reasons why it's where investors should be putting their money right now.