Brexit: UK equities “more attractive”, says NN Investment Partners

Big BenBrexit uncertainty has produced lower valuations of UK equities and transformed the market’s dividend landscape, creating a market rich with buying opportunities, NN Investment Partners (NNIP) said.

The balance sheet strength of many UK larger companies has improved, said Manu Vandenbulck, senior portfolio manager, equity value at NNIP.

Meanwhile, a recent Brexit conference hosted by Funds Europe heard that smaller UK stocks were more at risk from a UK departure from the EU due to higher exposure to EU revenues.

NNIP said UK stocks offer an average dividend yield of around 4.5%, well above the long-term average of 3.5%. On cyclically adjusted price earnings, the market is now around 1.5 times cheaper than its own long-term average.

Compared to the eurozone, the UK market is trading at attractive dividend spreads. This is attributable to the declining prevalence of commodity stocks in the FTSE; their index weight has halved since 2008. Exporters, which comprise 75% of the UK equity market, have also benefited from a weaker sterling, outperforming domestically orientated stocks.

Earnings momentum is also positive, with a net upgrade in the UK outlook for the first time in three years, whereas earnings momentum in the rest of Europe remains weak or stagnant, said NNIP.

“Although uncertainty will remain until the vote has passed, adding UK stocks to a European equity-dividend portfolio makes sense already today,” said Vandenbulck.

“Cautious investment spending has improved average balance sheet strength of many UK large caps.”

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