We published a bullish view on UK Stocks today on Seeking Alpha. Below are some excerpts:
- U.K. stocks are now trading at an extreme valuation discount relative to historical averages, global equity averages, and domestic bonds.
- Over the past 50 years when the dividend yield has been at current levels, annual subsequent returns over the next decade have never been below 10% real and 15% nominal.
- While the growth outlook is weak and dividends are almost certain to be cut, fiscal and monetary stimulus measures should prevent the kind of dividend cuts seen during the Global.
- It would take an estimated 60% real decline in dividends over the next decade in order for U.K. stocks to underperform bonds assuming no change in equity valuations.
“The MSCI UK looks very cheap in valuation terms. The price/book and price/sales ratios are the lowest on record going back 20 years with the exception of the March 2009 global financial crisis low. Relative to the MSCI World, the valuation discount is even more impressive. The U.K. trades at all-time lows in relative terms on both a price/book and price/sales basis. The dividend yield is also very attractive on both and absolute and relative basis, recently spiking to almost 7%. Not only is this over twice the level of the MSCI World, it is also a 3.6 standard deviation difference showing how far from historical norms valuations have become.”
“We fully expect dividends to get cut, particularly among the oil and gas companies, which have already fallen by 4% since their June 2019 peak. However, we would need to see a truly spectacular fall in dividends in order for total long-term returns to fail to exceed those of government bonds. Looking at some historical examples, dividend payments fell by 27% in the wake of the global financial crisis, while Case-Shiller data show that even during the Great Depression Dow dividend payments fell by only 55% in part due to crippling deflation.”
“While we expect the long-term real GDP growth outlook to be weak both in the U.K. and the rest of the world, the risk of deflation is low as the government will almost certainly respond to any growth threat by widening its fiscal deficit and engaging in debt monetization. We do not expect this to provide any support to growth from a long-term perspective, but it should be successful in preventing deflation and the kind of debt-deflation spiral that could result in deep protracted dividend cuts.”