The Hidden Value: Why British Stocks Are a Smart Investment Choice for 2024

Global markets are experiencing turbulent times, and investors are seeking stable and promising opportunities for capital investment. Together with the head of analytics at Blackshield Capital, Illia Kyslytskyi, we have outlined seven reasons that make British stocks an attractive investment.

1. Relatively Cheap FTSE 350 Index

The FTSE 350 Index, which includes the largest British companies, is relatively cheap compared to its historical values and other global markets. This makes it appealing for investors looking for undervalued assets with high growth potential.

2. M&A Activity

This year, a significant increase in merger and acquisition activity is expected. The total value of deals is likely to exceed last year’s figures, which could serve as a strong catalyst for the growth of British company stock prices.

3. Rising Commodity Prices and Bond Yields

Rising commodity prices, bond yields, and the strengthening US dollar contribute to the improvement of British companies’ production indicators.

4. High Dividend Yields and Share Buybacks

Shareholder returns in the UK may surpass previous records. It is forecasted that the sum of dividends and (net) share buybacks in the UK will be around 6%, exceeding 4.8% in Europe and 3.2% in the US. We expect dividends to remain the dominant factor in shareholder returns. Consensus forecasts predict an 8-10% growth in FTSE 100 dividends between 2023 and 2025. The banking and energy sectors account for two-thirds of the buyback expenditure in the FTSE 350 index, distributing around 10% of their market capitalisation through dividends and buybacks.

5. Increasing Margins

Our optimism about growth in the UK is also confirmed by the analysis of earnings season results: the level of margin and earnings per share growth is much higher than in other major markets.

6. Optimistic Macroeconomic Indicators

In the first quarter, the UK’s GDP exceeded the Bank of England’s forecasts. The composite PMI reached 51 points, the highest level in a year, indicating growth in both the manufacturing and services sectors of the economy.

7. Labour Party’s Victory in the Parliamentary Elections

As expected, the Labour Party won the parliamentary elections, ending the 14-year dominance of the Conservative Party led by the current Prime Minister Rishi Sunak. From a market perspective, interest rate cuts will be quicker. This is likely to lead to the normalisation of the yield curve and be favourable for bank stocks. The Labour Party’s victory is also moderately positive for the pound against the dollar and GDP growth.

What are the main risks for investors?

1. Slower Earnings Growth

Earnings per share growth in the UK lags behind the growth of the FTSE Europe index. The first-quarter earnings season shows a higher level of profitability in the corporate sector than in other major European markets.

2. Stalled Consumer Confidence Recovery

The recovery in consumer confidence observed last year has slowed. Although households are generally ready to increase spending, detailed studies indicate a more precarious situation for many households still adjusting to high living costs and interest rates. However, as wage growth continues and inflation is expected to reach the target of 2% in the second quarter, real consumption should improve, boosting economic growth.

Pension Funds

Analysing the UK market, it is essential to mention pension funds, particularly defined benefit pension funds. They have caused a £1.9 trillion decline in stock markets over the past three decades. This has been driven by a combination of factors, including market changes, unforeseen consequences of government policies, and financial regulation. However, we expect that large-scale sales of stocks by pension funds will decrease, as there are few stocks left for them to sell.

Which sectors to focus on?

If investors decide to invest in British stocks, they should look at sectors with high growth potential. These include financial services, healthcare, insurance, self-care, and travel and leisure. Media, utilities, and the real estate sector appear less attractive.

Investing in the British stock market under current conditions can yield significant returns due to high combined dividend yields and share buybacks, as well as favourable macroeconomic conditions. Close monitoring of the political and economic situation will allow for timely adjustments to the investment strategy and maximisation of profits.