Cheap UK shares at massive discount to US peers

This expert thinks stock markets are in a new multi-year bull market and UK shares are playing catch-up.

Cheap-looking UK stocks were in the spotlight today after a leading broker highlighted the valuation gap between Wall Street and London markets as the widest in three decades.

Liberum's latest research finds that the UK currently trades at a 30.4% discount to the United States, where the S&P 500 and Nasdaq have been at record highs in recent weeks.

The weighting of commodity-related sectors and banks in the FTSE 100 index is well known as one of the primary forces behind this valuation gap, which is the biggest since 1990.

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But Liberum also highlights that property and cyclical consumer stocks are much cheaper than their US counterparts and trade at a much larger discount than they historically have done.

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This is shown in the FTSE 100 index, which reveals a discount to the S&P 500 of 34.4% against 14.4% for the FTSE 250 index and the Stoxx Europe at a 21.4% discount.

The top flight has come under more selling pressure in recent weeks, falling 6.1% between 7 January and the end of the month, after the discovery of new variants of Covid-19 were accompanied by a row between the UK and EU about vaccine roll-outs.

Despite these developments, Liberum continues to believe that vaccine breakthroughs at the beginning of November have heralded the start of a new multi-year bull market.

The broker said today: “We remain optimistic for stock markets in 2021 and see the current setback as the anticipated short-term corrections that are typical for a nascent bull market.”

The UK-focused FTSE 250, which has been buoyed by the pre-Christmas Brexit agreement, declined by 4% over the final three weeks of January. Liberum added that a look at dividend yields confirms the picture of a FTSE 250 that is expensive relative to the FTSE 100.

Liberum noted that the 2.6% yield of the FTSE 250 is now 35% below that of the FTSE 100 at 4%, the biggest discount in at least 20 years.

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The broker continues to prefer small and mid-cap stocks over large caps, however, with its January list of top picks continuing to include Plus500 (LSE:PLUS), Genus (LSE:GNS) and Spirent Communications (LSE:SPT), as well as Cake Box Holdings (LSE:CBOX), real estate investment trust Civitas Social Housing (LSE:CSH), lighting businesses FW Thorpe (LSE:TFW) and Luceco (LSE:LUCE) and metals processor Sylvania Platinum (LSE:SLP).

The list also features pharmaceuticals business PureTech Health (LSE:PRTC), support services stock Smart Metering Systems (LSE:SMS) and technology company STMicroelectronics (NYSE:STM). Its stocks to avoid include Pendragon (LSE:PDG), Rio Tinto (LSE:RIO), Safestore Holdings (LSE:SAFE), Metro Bank (LSE:MTRO) and Dechra Pharmaceuticals (LSE:DPH).