Why it may finally be time to 'Buy British'

UK stocks have been amongst the most hated by investors for many years now, but with Brexit uncertainties largely in the back window and the vaccine rollout gathering pace, the risk/reward for UK equities is looking increasingly appealing.

The global economy looks set to improve in 2021 with the path being led for lockdowns to be eased and for people to return to work. This rebound should bring with it a greater rotation into value and cyclical sectors, improving equity markets such as the UK.

More than half of the UK's equity market is represented by financials, energy, industrials, materials and consumer cyclicals, compared with 32% for the S&P 500, whilst just 4% of the index is comprised of technology vs 30% for the S&P.

Research from Citi suggests that over the next 3 years, earnings of UK stocks should increase by 60% from 2019 - more than triple the earnings growth that is expected for the S&P 500.

Some of this momentum has already been priced into stocks, but the rally since the end of September of around 15% is still shy of the 20% that has been seen since that time for US value stocks.

As Wall Street concerns continue to rise around global stock market valuations, the UK also benefits from being amongst the very cheapest, with a forward P/E of 15x vs 20x for the MSCI world index.

One factor that investors must also consider for the UK is that of the FX markets, with around 70% of revenues in the FTSE 100 coming from overseas. Sterling has rallied in recent weeks against the majority of major currencies following completion of the Brexit deal and recent comments that negative rates are unlikely in the UK anytime soon. If we see further strength in sterling, this could limit the upside in UK equities, but such is the exposure to cyclicals that the region should still outperform.

For investors putting money to work in the UK, the hope will not only be that the vaccine rollout continues smoothly and efficiently, but that inflows also continue into British equites as investors betting on a global recovery in 2021 will also be looking at Japan and Emerging Markets as other ways to play the theme.