As 2021 begins, so does trading. And now the trading year begins with a bang as the FTSE 100 finished the first day of trading by getting 1.7%. Sterling also saw a slight improvement as it reached above $1.37 for the first time since 2018. Both of them are examples of two very vital trends.
First, the United Kingdom shares look very undervalued compared to other countries because of numerous political uncertainty. Second is that the EU-UK divorce and the trade agreement that the two made means that Brexit uncertainty should disappear, thus encouraging investors to rethink taking a risk at the UK market.
Is the UK Undervalued?
If there is one thing that investors do not like, it is the political and regulatory uncertainty, and unfortunately, Brexit is a reminder of that. In 2020, the UK stock market saw its worst performance since 2008. Meanwhile, the US stock market reached a record high, and the other markets also put an excellent performance.
The asset manager, Schroders, recently made a metric based on the average of three ratios for UK shares. They are the price to book, price to earnings, and price to dividends. The metric also showed UK shares were trading at a 30% discount to their global partners, which is considered the biggest gap for almost 30 years.
Since the Brexit referendum, business investment in the United Kingdom has been fragile in the five years, and it collapsed earlier in 2020. The latest bulleting from the Office of National Statistics or ONS showed that the UK’s business investment was 19% in September 2020, despite recovering by 9% in the last three months of 2020.
Recoveries in asset prices and investments are being driven worldwide by an abundance of money printed by central banks and government borrowing. Analysts call this the reflation trade. Some of the commenters have stated that the stock market will see a “roaring twenties,” which happened 100 years ago.
Unlike the previous recessions, the COVID-19 crisis has seen no shortage of any liquidity, and much of this has been added into asset prices, though the United Kingdom shares have lagged in other markets.
What is the Future of the UK Stock Market?
The deal gives both the UK and the EU zero tariff and quota access to each other’s markets, but it also helps the UK co-operate with the biggest trading partner.
The fact that the United Kingdom was the first to approve and administer the Oxford/Astra Zeneca vaccine is another way to boost the market sentiment.
The credit figures and the Bank of England’s money just this week show how money and credit are available in the UK economy. Around 105,000 approvals of mortgages for the houses sold in December 2020, which is the highest monthly number in the last 13 years.
Some families have used the pandemic lockdown as a chance to save. The ONS stated that the savings ratio, which measures the proportion of incomes that were not spent and instead saved, reached 27% in 2020.