The UK equities market is very inexpensively priced, with a future price-earnings multiple (PE) that is around 25% lower than long-term norms and over 50% lower than the US. According to Fidelity International’s recently published report, “Equities 2023: Market Uncertainty to Remain Amid Tighter Policy,” global equities will face high volatility and uncertainty in 2023, as stubbornly high inflation and interest rate rises lead to a rough landing for large parts of the global economy. Earnings forecasts, on the other hand, are differing among economies, allowing investors to capitalise on specific possibilities.
Following the steep sell-off caused by the worsening outlook and government blunders, there is a case to be made for the UK equities market to become an appealing hunting field in 2023. While the UK market has performed better than most this year, due in part to sector composition (with the majority of large-cap earnings coming from outside the UK), it remains relatively cheaply valued, with a forward PE that is around 25% lower than long-term averages and close to 50% lower than the US.
The large-cap FTSE 100 index remains essentially a bet on the global economy and a beneficiary of sterling weakening, whilst small and mid-cap companies are more vulnerable to domestic economic conditions. The latter are underappreciated and might benefit from any favourable economic surprise.
The United States paints a different picture. While there are some indicators of increased consumer pressure, real data has yet to shift lower, and markets are still a long way from pricing in the kinds of corporate earnings downgrades that would indicate a full-fledged recession. This raises the prospect of a more severe collapse in the S&P 500 next year if growth stops abruptly.
Nonetheless, small/mid-cap stocks look inexpensive in comparison to large caps, suggesting some chances. Meanwhile, growth companies continue to appear comparatively costly in comparison to value equities, with the valuation gap at historic highs.
Another possible danger for investors is additional US currency appreciation, which would cut company profitability even further. The S&P 500 has a foreign exposure of roughly 30%. Emerging markets have historically been particularly sensitive to changes in the value of the US dollar, and US firms are not immune to these headwinds when their overseas revenues begin to decline.