British stocks poised to rise as global investors flood back in

London shares have not looked this cheap since the 1970s. Sam Benstead reports

Global investors are returning to British shares with the London market trading at its cheapest levels for 45 years. Figures from the investment bank UBS show that investors have poured $4bn (£ 2.9bn) into funds that track British shares in the space of two months – a sharp reversal of sentiment.

November’s breakthroughs in the development of Covid-19 vaccines triggered a reassessment of London shares, which had been largely shunned by international investors since the EU referendum, and the revival gained further momentum after the signing of the Brexit trade deal in late December.

Richard Colwell, of Columbia Threadneedle, the fund manager, said foreign investors were attracted by the cheapness of London-listed shares, which have lagged global stock markets since the Brexit vote and have been among the hardest hit by the pandemic.

“British investors are still in shock from how far shares have fallen, but international investors are reappraising opportunities in Britain because of how cheap shares are here. Sentiment will continue to improve after a prolonged period of them being in the doghouse,” he said.

Mr Colwell added that private equity firms were already looking to take over British businesses because they were so cheap.

British shares are trading at their lowest levels since 1975 relative to other markets around the world, according to figures from Columbia Threadneedle.

The London market has a price-toearnings ratio, a gauge of how much shares cost relative to company profits, of 21.3, against a more expensive 27 for American shares.

Over the past five years, the FTSE All- Share index has returned 45pc, including dividends, less than half the 121pc from American shares and 116pc from global stock markets.

Analysts at UBS are bullish on British shares because of their cheapness compared with other stock markets and have forecast a rise of 10pc for the FTSE 100 index of blue- chip London stocks this year, or up to 19pc in their best-case scenario.

Jeffrey Sacks, of Citi Private Bank, said he was also positive about the outlook for British shares. He said a resolution to Brexit and the rapid deployment of Covid- 19 vaccines would boost the economy and encourage foreign investors to buy British once again.

“Prolonged uncertainty over Brexit and domestic politics has affected confidence and investment from overseas investors,” he said.

“Even accepting that Britain’s longterm economic recovery plan is not yet clear, the Brexit and domestic political overhangs are now resolved. The impressive progress with vaccination should result in more economic growth.”

After several years out of favour, he said there was now pent-up demand for British stocks.

Mr Sacks said the best opportunities lay in stocks that had performed badly last year but that would rebound when growth picked up.

He suggested banks, energy companies and miners.

The income on offer from British shares is also attracting foreign buyers.

The “yield gap” in Britain – the average dividend yield relative to the government bond yield – is the widest globally, at 2.8 percentage points, according to Mr Sacks. This makes shares far more attractive to income investors than bonds. London-listed shares yield 3pc on average, which makes Britain one of the best places in the world to find income.

The outlook is turning even more positive for dividend-paying stocks, added Mr Sacks, because many companies were starting to, or planning to, reinstate dividends. These companies include banks, were forced to suspend payouts in 2020.

‘Sentiment will continue to improve after a long period in the doghouse’