UK value stocks’ rocketing value

Peter McGahan explains what value stocks are and why they are so attractive when inflation rates rise.
UK Value stocks rocketing value

UK value stocks have been as loved as a sneezing fit in a lift, or any confined space for that matter.

What is a value stock and why does that matter?

Value stocks are stocks that are low because the market has simply priced them lower than they are currently worth for varying reasons. Simple measures like a price to earnings ratio can give you a speedy flavour of whether a stock is good value or not.

Investors are keen to buy such unloved stocks before everyone else in order to buy on the upswing.

Many of your pensions/investments are simply managed by a fund group in a dark tunnel somewhere, and you don’t know how much exposure they have to such potential upside.

You mightn’t be surprised that many large clumpy funds are not managed that dynamically, relying on the apathy of investors to just allow their pension provider to take the fees and hope that all is well – a strategy I’ve never seen working in 34 years of this profession.

I wrote about value investing just over a year ago and make no apologies in repeating.

Brexit impact on UK value stocks

UK stocks were battered by the B word Brexit and its uncertainty, and then, the C word Covid. Stay clear of anything beginning with D for a year.

Overseas investment funds, and indeed UK investors had dropped UK value stocks like the handkerchief in the aforementioned lift until last year.

Since mid-October, value stocks have rebounded, outperforming the tech strong Nasdaq. It has also outperformed the growth sector since last summer too.

Many UK investors missed out on that return as there was a move away from UK stocks in January and February.

We’ve talked before about the record savings that have built up over the last year as people weren’t spending, but confidence will be key in the UK if that money is to flow into UK stocks.

It is estimated by the office of budget responsibility that nearly 10% of the UK’s gross domestic product (basically its economy) is sat in these newly held savings.

Inflation to deliver unexpected boost?

Compared to dividends or assets, UK value stocks are still cheap compared to benchmarks and that’s off a performance of the worst underperformance in two centuries.

The FT reported recently that at the end of December, UK value stocks’ ratio to the balance sheet of their assets was 0.91. Global developed equity markets was 2.89. Read that again.

A further driver to value stocks’ potential attraction is their attractiveness in an inflationary environment.

Most investors have seen the Tsunami of government money thrown into the economy and know there is further money to arrive, and naturally believe that will create inflation. Remember inflation is also seen as a solution to debt – inflation erodes its value.

In the States, Jay Powell has made it clear he wants full employment. He is also considering pegging interest rates just below inflation, allowing it to exceed normal targets for a while, effectively encouraging higher inflation by average inflation targeting.

The result has to be inflationary, and the UK will import some of that inflation. How much, I don’t know, but the obvious benefactor will be UK value stocks.

Consider some of the previously mentioned funds in the article that you may or may not have in your pension/investment portfolio.

Polar cap value is up 12.4% over the last three months alone. It has rocketed 41.2% over the last twelve months. Man GLG undervalued assets is another we mentioned a year ago which is up 11% in the last three months and 38% over the last year. The final fund mentioned in that column was Artemis UK select. It is up 13.9% over the three months and a staggering 65.6% over the last year.

You should look at your pensions and ascertain if they are being rotated accordingly by your adviser/manager to maximise these opportunities.

There is nothing more expensive than apathy. Trust me.

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Last modified: July 6, 2021

Written by 6:40 pm News & Views