Why to Invest in U.K. Stocks in 2022

(Bloomberg) --

A growing chorus of investors is highlighting opportunity in Britain’s laggard stock market in their 2022 outlooks.

“The U.K. still stands out as cheap and unloved,” Fidelity International portfolio manager Alex Wright wrote in a report on Tuesday, adding that retail investors have pulled about 1.3 billion pounds ($1.7 billion) from the country’s equities this year.

Company trading updates confirmed a strong outlook driven by the Covid-19 vaccine rollout program and the removal of Brexit uncertainty, said Wright, who manages Fidelity’s Special Situations and Special Values Plc funds. M&A activity involving U.K. companies -- which has been elevated this year due to low valuations -- is likely to continue, he added.

Meanwhile, Liberum Capital Ltd. said that U.K. stocks, which have underperformed European and U.S. benchmarks this year, offer the best combination of value and growth worldwide.

 “It is rare to find a market that is both cheap and fast growing,” strategist Joachim Klement wrote in a report on Tuesday. Analysts expect U.K. company earnings to grow by about 43% over the next 12 months -- almost three times expectations for the U.S. -- while price-to-book valuations trail the U.S. by 63%, he said.

Fidelity and Liberum follow JPMorgan Chase & Co. strategists, who last month recommended investors buy U.K. stocks for the first time since the 2016 Brexit vote. Britain’s equities had lagged Europe and the U.S., partly due to trade tensions, the bank said, adding that the U.K. market looked “near record cheap” levels.

Among individual stocks, Fidelity’s Wright likes companies that have undertaken restructuring action or have seen competitors exit the market due to the pandemic, such as Marks & Spencer Group Plc, Ryanair Holdings Plc, AIB Group Plc and C&C Group Plc, which he holds in his funds.

Still, he cautioned that U.K. earnings face risks from supply chain issues and inflation, with U.K. housebuilders a sector that may suffer.

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