The FTSE 100, which lists UK stocks with the largest market capitalization, has underperformed most of its European peers in 2021.
France’s CAC 40 is up 26% year to date, Italy’s FTSE MIB Index is up 21%, and the German DAX is up almost 15 percent, during the same period.
Meanwhile, across the English Channel, UK stocks are trailing, with the FTSE 100 up 10% over the year, with only Spain’s IBEX 35 underperforming up just 2.6% year to date.
Could UK stocks be undervalued and represent a sharp contrarian play for 2022?
A recent piece in visual capitalist entitled, Four Reasons to Watch UK Equities is putting a positive spin on UK stocks.
The reason given for buying UK stocks is weak
The first reason given is that the UK market is not the UK economy is nothing unique. Most large-capitalization stocks have global exposure that is why they are called multinationals.
For example, Renault held approximately 41 percent share of the passenger car and light commercial vehicle market in Morocco and 30 percent in Russia.
Another reason given for buying UK stocks is that UK Firms are ESG Leaders.
“UK firms are also leaders in gender diversity, consistently tracking ahead of other developed markets,” wrote visual capitalist.
But when you bet on a horse, do you care whether the horse is a black horse or a white horse. You want to bet on the horse that runs the fastest and wins.
We would rather read that UK firms are leaders in promoting talent, irrespective of gender, ethnicity, social background, or sexuality.
Are UK companies in business to promote diversity or make profits?
If diversity comes first and performance second, the competition has a heads up.
A boom in International Public Offerings (IPO) is another reason why UK stocks are worth watching, according to the piece
So in 2020, the London stock exchange had 35 IPOs and 47 IPOs in 2021.
But Global IPO had a record-breaking 2021, with volumes rising by 64% and proceeds by 67% year-on-year (YOY).
So if the London exchange experienced a 64% increase in IPO business in 2021, the number of IPOs should be 56, not 47.
The case for buying UK stocks is still not convincing
The GBP continues to fall against the USD following Brexit.
Frankly, the UK separating from its nearest trading Bloc with a GDP of USD 15.1 trillion (2019) should have been a strategic decision, based on national interests and not on political whims.
Brexit has hurt capital flows into UK stocks.
“Since the referendum, there has been a lack of investment in the UK due to the uncertainty that surrounds Brexit. It also reflects on companies either putting plans on hold or choosing to invest in other European countries. There have already been some instances of backtracking from big businesses who are waiting to see which direction the UK will take on trade agreements,” according to Cash Float.
We believe that until the UK finds its political compass, the capital flows and investments in UK stocks could continue to remain negative. Maybe if Westminster flushes out the cocaine sniffers, gets serious about politics and its relationship with the EU, UK stocks could find their place in the sun.