A Quick Analysis of the UK Markets

Compared to its western peers, the UK equity market seems stagnant. UK firms are fleeing to the US, valuations are at historic discounts, and pension funds have abandoned UK equities. The market is structurally broken but potentially undervalued.

Despite the FTSE 100 being at all-time highs, there's no doubt the UK equities market has been lagging behind. The metrics below that the UK stock market is trading at unprecedented discounts to both the US and Europe.

Metric	UK (FTSE 100)	EU (STOXX 600)	US (S&P 500)	UK vs EU	UK vs US
Trailing P/E Ratio	12.9x	17.9-18.3x	28.9-31.0x	-28% to -30%	-55% to -58%
Forward P/E Ratio	12.5x	14.1-14.5x	23.7x	-11% to -14%	-47%
CAPE Ratio (Shiller)	18.6x	20.8x	31.1x+	-11%	-40%
Dividend Yield	4.0%	~3.0%	1.5%	UK 1.3x higher	UK 2.7x higher
Price-to-Book	Low	Moderate	High	Discount	Significant discount

Europe is in the sweet spot—below the overcooked US market but above the UK, still at a 30% premium. The S&P 500 is at 80.9% above its long-term average, in "strongly overvalued" territory. Europe's STOXX 600 at the 70th percentile of its historic range is a bit high but not bad. The UK, on the other hand, is undervalued even relative to its own depressive historic averages.

Why Valuations Differ: It's All About Sectors

The differential sector mix explains the majority of the valuation difference. Technology is just 1% of the FTSE 100, compared with 10% in Europe and an astonishing 30% in the S&P 500. The UK felt not a whit of the whole 15-year tech boom powering world equity returns.

Instead, the UK is front-heavy in "old economy" sectors. Financials (mostly mature banks and insurers) have 23% of the FTSE 100, compared with 14% in Europe and 13% in the US. Energy exposure is muscular thanks to Shell and BP, and materials (mining) is the second weighty sector. Consumer staples represent 18% of the UK market, three times the US proportion.

Cause of Concern 1 - Listing Flight

The UK seems so hostile for companies:

• 88 companies delisted or moved listings in 2024 vs. only 18 new listings

• 56% of UK businesses discussed moving abroad (up from 27% in 2023)

• Only 18 IPOs in 2024 - lowest on record

  AstraZeneca was listed in the US earlier this month, and other companies could follow to get a broader investor base and also the fact that the US values companies much more.

Cause of Concern 2 - Pension Exodus

• DC Pension funds cut UK equity allocation from 53% (1997) to just 6%, for DB Schemes it's as low as 2%.

• UK now allocates less to domestic stocks than any other primary market

This is bad because you essentially removed the natural buyer base for UK stocks, and this creates a vicious cycle: less demand → lower valuations → even less attractive.

The fact is, the UK is too risk-averse—some may think that's a good thing, while others don't.

What's being done?

But there is still hope, the FTSE 100 is at an all-time high (9,756.14) due to strong results from GSK and Next and rising commodity prices. The UK economy is uncertain but right now, we can see substantial gains in the coming future.

To address the Listing Flight, the UKLA is making it easier to list in the LSE by simplifying rules to compete with US, dual-class shares are now permitted and removing bureaucratic barriers (such as big equity requirements). This fixes the supply side issue but the demand issue is there.

There has also been a Government proposal to push pension funds to allocate 5-10% to UK equities. And this could inject £25 billion into the economy by 2030 (Gov.uk). This is a bit controversial. Is it right to force savers into underperforming assets?

Whatever may happen, the UK equity market is still considered undervalued, and it seems strong for investors who want solid returns.

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