Jeff Prestridge: 25 good reasons to buy the UK stock market

Peering through the gloom, our columnist finds that UK shares are as cheap as they’ve ever been compared to international peers. Reason to be cheerful, surely?

In these days of political sleaze, economic uncertainty and rising taxes (from April next year), it’s hard to look at the UK with any degree of relish. Although it’s wonderful to be post – rather than mid - lockdown, I can’t say the immediate future fills me with bundles of enthusiasm.

Yes, it’s great once again to be able to go up on the train and watch West Bromwich Albion Football Club whenever they play at home on a Saturday (rarely, thanks to Sky Sports’ tight TV grip on the EFL Championship). And, of course, live music, theatre and film are back to titillate and entertain us (something long-ball obsessed WBA have failed to do so far this season).

But the ending of lockdown hasn’t been the enriching experience I thought it would be. Rather than a lifting of the mist, the country seems to be heading for the economic buffers. Inflation is back with a vengeance, rudely eating into our household finances (both income and our savings).

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Taxes are heading ever higher and acute labour shortages are disrupting the way many companies – from train operators through to restauranteurs – are going about their business. More cancelled trains, more ‘fully booked’ restaurants, even though they’re only half full. Corporate earnings are under pressure on all fronts as costs rise.

As a result, looking for cheery good news is becoming more difficult by the day. Yet, occasionally, someone comes out of the woodwork and gives the UK the thumbs up rather than the expected thumbs down. My persona – temporarily at least – transforms from sourpuss to optimistic.

Earlier this week, it was the mighty American investment bank JPMorgan Chase & Co (NYSE:JPM) that came out with some optimistic noises about the UK – and in particular the UK stock market. In a 30-page research note, it advised its clients to start buying more UK stocks on the basis they are currently standing at near ‘record cheap’ levels.

‘We now…raise UK [stocks] to an ‘overweight’ in a European and in a global context,’ stated Mislav Matejka, JP Morgan’s head of global equity strategy. In other words, buy the UK stock market.

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UK stocks, JP Morgan added, have lagged US and Eurozone stocks by a cumulative 50% and 24% respectively since the Brexit referendum in 2016 – resulting in a ‘record discount’ in their valuations relative to other regions on a price-to-earnings and price-to-book value basis. Translating into Daily Mail language, UK equities look comparatively cheap compared to shares in other markets – especially the US.

JP Morgan then provided a list of 25 UK equities it likes: primarily FTSE 100 companies such as AstraZeneca (LSE:AZN), BT (LSE:BT.A), Barclays (LSE:BARC), Imperial Brands (LSE:IMB), Lloyds (LSE:LLOY), Shell (LSE:RDSB) and Tesco (LSE:TSCO). Most of the companies it likes have healthy dividends – another fact that makes the UK stock market stand out from the madding crowd, JP Morgan said.

JP Morgan is not a lone voice. Investment trust Ruffer (LSE:RICA) an all-weather fund that attempts to make positive returns ‘come rain or shine’, currently has its highest exposure to UK stocks in a decade. Indeed, it holds some of the stocks JP Morgan likes – its top 10 equity holdings include Lloyds and Shell.

On Tuesday, Ruffer’s investment director Hamish Baillie told me that the case for the UK stock market was a simple one: value for money. ‘As a trust, we always like to buy things that are under-valued,’ he said. ‘And in the UK, there are currently companies that are offering very good value.’

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Baillie’s enthusiasm for the UK is also fuelled by the recent raft of merger and acquisition activity – a sign that big private equity companies and overseas buyers view companies listed on the UK stock market as compelling value for money.

When they come, Baillie added, higher interest rates will play into the hands of the UK’s big banks (Lloyds and NatWest (LSE:NWG)), giving them room to widen their spreads and push up profits.

Of course, you could argue that some of the arguments expounded by JP Morgan’s strategists and the investment brains behind Ruffer are recycled ones. They were made in the aftermath of the Conservative Party’s landslide victory at the polls in December 2019. They were made again after a new trade deal was struck with the EU in late 2020. Yet the UK stock market failed to respond positively for very long on both occasions.

Maybe, it’s a question of third-time lucky. 

For the record, JP Morgan’s 25 top UK stocks are AstraZeneca, BT, Babcock (LSE:BAB), Barclays, British Land (LSE:BLND), Britvic (LSE:BVIC), Centrica (LSE:CNA), DS Smith (LSE:SMDS), Glencore (LSE:GLEN), Grainger (LSE:GRI), IMI (LSE:IMI), ITV (LSE:ITV), Imperial Brands, IIntermediate Capital Group (LSE:ICP), JD Sports (LSE:JD.), Lloyds, Melrose (LSE:MRO), Reckitt (LSE:RKT), Royal Mail (LSE:RMG), Shell, Taylor Wimpey (LSE:TW.), Tesco, Travis Perkins (LSE:TPK), Victrex (LSE:VCT) and WPP (LSE:WPP).

For the record (again), I think investors would be wiser to get exposure to a UK-focused investment trust which has a predilection for the dividends that JP Morgan likes.

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A recent report by clever analysts at Investec identified a number of UK equity income trusts with sufficient armoury to keep investors sweet with a combination of potential income and capital return. JPMorgan Claverhouse (LSE:JCH) (pure coincidence), Dunedin Income Growth (LSE:DIG), Schroder Income Growth (LSE:SCF), Diverse Income (LSE:DIVI), Law Debenture (LSE:LWDB) and Aberdeen Standard Equity Income (LSE:ASEI) came out of their analysis smelling of UK roses.

A final thought. There are no guarantees in life other than death.