UK public companies are trading at a valuation discount totalling about £500 billion since the “scarring impact” of the Brexit vote six years ago, according to research by a City stockbroker.
Since 2016, when Britain voted to leave the European Union, the valuation of companies on the FTSE all-share index has settled at a 20 per cent discount to the rest of the world, on an adjusted basis, Panmure Gordon found. It is the largest divergence since the early 1990s.
The discount rises to 37 per cent on an unadjusted basis, when not taking account of the FTSE’s greater weighting of banks, miners and oil companies and the global market’s leaning towards tech companies, Panmure’s research showed.
Simon French, Panmure’s chief economist, said the large gap reflected a lack of confidence among investors in UK companies to deliver on their profit forecasts, with concerns about a no-deal Brexit and now a trade war with the European Union over Northern Ireland both having added to the risk of failing to execute its plans.
The research, conducted in April after the first quarter, was issued following the recent UK equity market outperformance, which French said was a “welcome distraction from more than five years of persistent underperformance” and had been driven by rising global interest rates and the “keen valuations” since Brexit.
The FTSE 100 closed up 75.27 points, or 1 per cent, at 7,608.22 yesterday, extending gains this year to 3.2 per cent.
Despite the recent improvement, however, French said that active asset managers “can be forgiven for not jumping for joy” as the discount remained “remarkably unchanged with investors continuing to discount earnings upgrades from UK public companies at a higher rate than from their European and American counterparts”.
UK equities trade on a valuation of 12 times next year’s earnings, “materially below” the 16.1 times figure for the rest of the world and the UK’s 30-year average of 13.7 times, the research showed. “UK valuations have been stubbornly below these levels for the last six years since the Brexit vote,” French said.
A second quarter of outperformance as central bankers tackle inflation “may increase the pressure to close out long-dated UK short positions”, but for “long-suffering UK investors this may be the best outcome of what otherwise is a darkening economic backdrop”.