Goldman’s Bell Says U.K. Stocks Offer Good Value After Bounce

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(Bloomberg) — U.K. equities still offer good value despite the FTSE 100 Index outperforming major developed stock markets this year, according to Goldman Sachs Group Inc. strategist Sharon Bell.

“The FTSE 100 still looks very cheap,” Bell, Goldman’s equity strategist, said in an interview. “It’s slightly closed the gap with the U.S., but the gap is still massive.”

READ: FTSE 100 Approaching Record High Faster Than Peers: Taking Stock

The U.K. blue-chip gauge is now about 3% away from a record high, nearer to its peak than most other major developed markets thanks to its exposure to large commodities firms and defensive sectors like healthcare and utilities. But even after this year’s outperformance, U.K. shares remain cheap as the FTSE 100 trades at 11 times estimated earnings, compared with about 19 times for the S&P 500 and 13 times for the Euro Stoxx 50. 

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Energy and mining companies, which have a 24% weighting in the FTSE 100, continue to be a key driver for the index, with firms like Anglo American Plc and Shell Plc jumping as oil and base metal prices surge. Rallies in former laggards London Stock Exchange Group Plc and Pearson Plc are also helping, along with a gain in BAE Systems Plc as the prospect of increased defense spending in Europe has fueled advances in munitions suppliers.

U.K. equities are seen as an alternative to the tech-heavy U.S. market, as well as to emerging markets where risks have increased in recent months with the war in Ukraine fueling inflation and economic growth woes.

The U.K. market has “a lot of commodity-exposed companies that provide a hedge against inflation,” Bell said. 

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To be sure, there are notable risks for the FTSE 100’s outperformance. If Russia backs away and tensions ease, commodities could deflate to pre-invasion levels, hurting U.K. earnings, Bloomberg Intelligence says. And if the war escalates, rising rates and volatility could drive a plunge in price-to-earnings ratios that could lead to an 11% drop in the index, strategists including Tim Craighead calculate.

And for the U.K. midcaps, they’ve been underperforming blue-chips this year as surging inflation is weighing on consumer spending. The FTSE 250 Index is down about 10% so far this year, in contrast to the 3.4% gain for the FTSE 100, while the FTSE Small Capitalization Index has fallen 7%. 

“Generally, FTSE 100 looks better than the mid- or small-cap indices and especially small caps,” said Bell. 

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