The UK stock market trades at a 20-year low valuation against the US, which means, said Merchants Trust (MRCH ) fund manager Simon Gergely, that while investors pay £10 for every pound of profit here, on Wall Street they have to stump up $20 for every dollar. Gergel cited other factors to explain why he takes a ‘glass-half-full’ approach in believing a UK rerating cannot be far away.

This is the first video excerpt taken from our recent virtual event with Gergel. If this whets your appetite you can watch the whole online broadcast here.

Can’t watch now? Read the transcript

Simon Gergel:

[In reference to a chart showing UK stock market ownership] Back in the late 1980s and early 1990s, when I started my career, half the UK market was the pink and salmon colours or red and salmon colours, which were domestic insurance companies, institutions, and pension funds. They own about 4% of the market now. So, they’ve sold out almost entirely, for lots of different reasons. Half of the market is now owned by foreign investors.

Now, the good news about that… that has its challenges of course, because foreign investors want to buy the market, if they want to buy UK and they haven’t done it in the last few years. That could change, if sentiment to the UK improves as people could come in and there could be a lot of buying and there’s not much left to sell from the domestic institutions. So, I see this as a glass half full rather than a glass half empty, but clearly, it has been a big challenge over the years.

Just a few statistics. On the left-hand side of the page in front of you, we look at the valuation of various markets around the world. This is from Goldman Sachs UK, on the right-hand side of that, is trading at ten times earnings. It’s right at the bottom of its 20-year range, how much you pay for a pound of profits, you pay £10. America, on the other hand on the left-hand side, is trading at 20 times. You’re paying $20 for every dollar of profits and that’s right at the top of their long-term range. So, you’ve got this quite unusual situation where the UK is very cheap versus history at the same time as the US and many other markets are quite expensive. Then within the market, on the right-hand side, distribution of valuations is incredibly wide.

So not only is the market cheap compared to history, but there’s a very broad spread. The gap between value and growth or really, the gap between highly-rated and lowly-rated stocks, is as wide as we’ve seen it in 50 years, wider than it was during the TMT [technology, media, telecom] bubble in 1999. So that’s a fantastic opportunity for stock pickers because you’ve got a cheap market and lots of opportunities and a broad spread within that.