Some 47% of investors plan to up their allocations to domestic stocks in the coming year as the widening valuation gap between the UK and the rest of the world has become almost too much to ignore, according to a survey by Fidelity.
The survey of 13,000 UK retail investors conducted earlier this year found almost half expected to increase their exposure to the home market in the next 12 months, ahead of the emerging markets (31%) and the US (29%).
Much of this is due to the stark valuation differences between the UK and the rest of the world. Domestic stocks trade at an average price-to-earnings (P/E) ratio of 12.7x, almost half the US’ 22.3x.
Markets based on different metrics
Source: Fidelity International
On a cyclically-adjusted basis, the UK market’s ratio of 17.5x is less than half the US (40x) and lags Europe, Japan and the emerging markets.
Jemma Slingo, pensions and investment specialist at Fidelity International, said: “Valuation gaps between markets are now quite stark. The US continues to look expensive, largely because of the strength of its technology sector, while the UK stands out as much cheaper.
“These differences reflect contrasting expectations for growth. Ultimately, when assessing any valuation metric, investors are making a call about growth. If a company, region or sector is expected to grow quickly, it will tend to command a higher valuation. It is when doubts creep in that problems can arise.”
This has not always been the case. A decade ago, UK and US markets were valued at similar levels but the US has shot higher on the back of the technology boom, amplified in recent years by the rise in AI.
More recently, the FTSE 100 has been closing this gap against the S&P 500, with Slingo noting that investors could be “looking more closely” at cheaper areas of the market.
However, there is a trade-off between price and growth potential, Slingo said.
“Cheaper markets may offer opportunities, but much depends on whether expectations improve from here,” she added.