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Insightful analyst, fund manager and accountant lan Robertson shares his tips to help investors understand what questions to ask when making investment decisions.

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March 28, 2024

US vs UK – is analysis what the UK undervalues most?

There is a lot of posturing and noise about the issue of UK-listed stocks trading at huge discounts to those in the US.  It is difficult at times to work out what is marketing and what is an attempt at genuine analysis.

This is neither – I am just pointing out what should be obvious, but somehow isn’t.

It has long been evident that a discount exists, but the methodologies for much of the analysis are blunt and, in some cases, dubious. It’s hard to believe that the recommendations that accompany them are going to be better thought out.

That said, ‘the discount’ shouldn’t stop smaller-scale investors buying UK stocks if they have done the right research.

The UK and European discount to US markets has been around seemingly forever

Yes, the discount has expanded and contracted over the years and the factors that drive it have changed (accounting is not the factor it once was), but simply plotting a chart of P/Es ‘for the market’ is not really analysis. It doesn’t explain anything.

OK, you can look at it on a sector-by-sector basis to gain some colour. This will reveal some deep sector discounts, but it is hard to find a broad sector that is similar across both the UK and the US.  You can’t draw any conclusions until you have done the analysis to show that you are comparing like for like or have undertaken some reconciliations.

So, to explain it on a sector basis you end up with a stock-by-stock basis.  You don’t have to do all of them – a sample would do.  But here’s the rub, what you are asking of this analysis is to put US stock vs UK stock and attribute how much of the difference is the UK vs US effect and how much is brand, product, positioning, growth potential, management, pension, deferred tax, associates…the list goes on.

And all this is alongside the more general matters that should be addressed, such as removing the effect of exchange / interest rates, accounting, market capitalisation / free floats / liquidity…this list also goes on.

It only takes a few of these issues to change the explanation of the discount from that of a fundamental undervaluation to that of an accumulation of basic analytical failures and misunderstandings (or laziness) by the commentators.

Takeovers tell us nothing for sure either

Every UK company that gets taken over by a company from overseas is jumped on as evidence that the whole market is cheap.

But for every time a US corporate runs its slide rule over a UK company and concludes that it is cheap, who knows how many are concluding that another listed UK company is overvalued or even worthless?

You have to consider the full dataset, not just the ones that you have the data for – as illustrated by Abraham Wald and his analysis of damage to US military aircraft in WW2.

 

All investors should understand Survivorship bias:

https://en.wikipedia.org/wiki/Survivorship_bias

Abraham Wald was more than your average statistician:

https://en.wikipedia.org/wiki/Abraham_Wald

Image: McGeddon based on a Lockheed PV-1 Ventura drawing (2016), vector file by Martin Grandjean (2021)

While premiums of 50-60-70% should raise eyebrows, they are not demonstrations of a gulf in valuations between markets because US:US premiums are still in mid-double figures % and US buyers have historically generally paid higher premiums when venturing overseas.  As we saw in our review of the LSE’s 2023 departures, the mega premia are rare.

https://progressive-research.com/insights/the-health-of-the-uk-stock-market-are-bankers-and-the-lse-just-pulling-a-sickie/

Given the track record of corporate acquisitions, it would perhaps be a bit hasty to conclude that the prices being paid for these companies are the right price.  It’s possibly too early to say – but as an example, Lookers does not look like £504m (47% premium) well spent.

So what is one to do?

For all the noise, we are in fact none the wiser about the nature of the discount and we certainly don’t have anything that tells us the discount won’t close or expand. (Sorry, this is an exercise in thought and logic, not sentiment or wishful thinking…)

For investors it is difficult to see how this not-new ‘knowledge’ changes any investment decision without there being a view on what is going to change the situation, and when that is going to happen.

It certainly doesn’t stop small-scale investors buying and making money if they have done the right research.

It probably wouldn’t hurt if the powers that be made that easier or put a stop to the random noise generators.

 

 

Ian Robertson

irobertson@progressive-research.com

07768 276595

 

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