UK Stocks Are the 'Most Hated' Investment in the World – But One Strategist Says That Could Be an Opportunity

A StoneX analyst said this week the UK equities are 'the most hated, underowned asset class in the world,' but the stock market is undervalued compared with peers, considering higher dividend yields and more exposure to global sectors like finance, energy, and mining.

'If you want European exposure, the UK is the least bad option. Valuations are compelling, and you're paid to wait with dividends,' Vincent Deluard, StoneX's head of global macro strategy, said in a recent episode of the Maggie Lake Talking Markets podcast. 'You're getting 6 % to 7% dividend yields in some sectors — that's real compensation for the risk.'

He believes 'the FTSE is not really about the UK economy. It's a global index in disguise: oil, mining, pharma,' adding that the UK was once the global centre of finance and trade, and, 'there are still good assets.'

The analyst believes that British-defined benefit pension programmes in the past had 50% exposure to local equities, but are now down to about 5% today.

'I don't think a single country has that level of self-hatred as the UK has today,' he said, arguing that the pattern could persist as the country grapples with political volatility. However, Deluard said, the low exposure means that the selloff of British assets after the Brexit referendum in June 2016 is 'exhausted'.

'If I really want to squint, I think we see some green shoots in the UK,' he said, adding that FTSE-listed stocks have marginally outperformed other regions and the economic surprise has generally been a bit better. The UK Office for National Statistics recently reported that GDP increased by 0.4% in July, beating economists' flat consensus forecast.

Deluard Urges Investors to Exercise Caution in UK Markets

Despite highlighting potential UK stock market drivers, Deluard said he's not bullish on British stocks and isn't advocating for them as stand-alone investments. He cautioned that Europe faces structural fragility due to aging demographics, high debt loads, and energy dependence.

'Europe is not just slowing, but structurally handicapped. The fiscal room is gone, and the political will to reform is absent,' he noted. 'The euro is telling you the story: capital is fleeing, and investors don't see growth coming back.'

However, the UK's sector mix, global exposure with many listed firms earning revenue from outside Europe, and the currency factor—the Pound being volatile but not as structurally weak as the Euro—are some factors that could support UK markets.

Deluard Recommends Shorting the Euro

For investors looking to open long positions in UK equities, Deluard suggested that the investments could be worth pairing with one trade: shorting the euro against the yen.

He said that the yen has benefited from devaluation and the Bank of Japan's having kept interest rates at or less than zero for over two decades.

'I don't think people kind of appreciate how massive and unprecedented this yen depreciation has been. Since the 2011 earthquake, the yen has lost 50%,' he said.

'Japan actually has a small primary surplus' as tax collections in the country have grown much faster than GDP, he noted, adding that Japan can raise rates without 'breaking things'.

The analyst believes the euro faces similar obstacles to the yen in the 2010s, which, he said, can likely only be fixed by a 'massive depreciation'. However, the process will be 'messier in Europe', which is facing increased political polarisation.

He added that 'the cancer' of the next sovereign-debt crisis is in 'the heart' of the bloc, with France seeing both the political far left and right rising in popularity, while far-right Alternative for Germany, or AfD, gains traction.

'If Europe enters a lost decade, the euro will keep bleeding lower. Against the yen, the downside is clear — it's a crisis trade that pays off,' Deluard concluded.

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