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2 reasons to buy UK equities in 2023, according to Schroders

By:
on Dec 21, 2022
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  • UK equities are undervalued on many metrics
  • Small and midcap UK companies have the potential to outperform in 2023
  • A significant performance dispersion between different sectors of UK equities persisted in 2022

As inflation has hit multi-decade highs in the United Kingdom and most of the other major economies, interest rates have risen. So suddenly, investors find it more attractive to park money into bonds with attractive yields than to risk it all on the equity market.

Yet, UK equities have been more resilient than many other world markets in 2022. By the end of November, the energy, aerospace and defense, and the pharma, biotech, and life sciences sectors have performed best.

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Energy led with a 54.5% return. In addition, a strong commodity market throughout the year led many oil majors to increase dividends and buy back shares.

So can UK equities deliver comparable results in 2023? Here are two reasons to buy UK equities, according to Schroders, a London-based wealth manager:

  • UK equities are cheap on many measures
  • Small and midcap companies to outperform

Cheap UK equities should attract investors

The main reason cited for why UK equities are attractive to investors is the fact that they are cheap on many measures when compared to their peers. For instance, using CAPE, or the cyclically-adjusted price to earnings, UK equities are much more attractive than US ones (5% vs. 15% – end-of-month valuation vs. 15-year median – % above or below).

Also, 26% of UK equities are cheaper than US, Europe, Japan, and even emerging markets on a metric such as the forward P/E.

Small and midcap companies expected to outperform

2022 brought a sharp underperformance from the small and midcap equities. The rare thing is that the extent of such underperformance is unusual and what followed in the years to come was outperformance.

Hence, if there is an opportunity, it should be found in the small and midcap UK companies with a strong balance sheet.