UK equities are the second-cheapest among major global markets, according to analysis from Fidelity International.
Fidelity said looking at the data across the world the UK consistently ranks as one of the least expensive developed markets, while the US stands out as the most expensive.
This reality is starting to hit home with retail investors, with close to half of those questioned by the firm (47%) saying they expect to increase exposure to their home market over the next 12 months, compared with 31% for emerging markets and 29% for the US.
Fidelity noted that the closely-watched cyclically-adjusted price-to-earnings (CAPE) ratio, highlights the valuation gap between the UK and other equities markets.
The firm described it as a ‘more sophisticated’ version of the price-to-earnings ratio, which looks at a stock market’s profits from the past ten years, takes an average, and adjusts it for inflation.
A decade ago, UK and US markets were valued at similar CAPE levels, but the gap has widened significantly, in large part due to the tech boom in America.
As of May, the UK equities CAPE ratio was at 17.5, with the US at 40, Europe at 21.5, China at 14, Japan at 27 and emerging markets at 22.2.
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Recently, the FTSE 100 had been making up some ground as sectors such as energy, mining and defence rose, but US valuations are moving ahead again with a strong earnings season.
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,” she continued. “It is when doubts creep in that problems can arise. Our research suggests investors could be looking more closely at these cheaper areas of the market.
“For investors, this highlights the trade-off between price and growth potential. Cheaper markets may offer opportunities, but much depends on whether expectations improve from here.”
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