Merchants Trust (MRCH ) fund manager Simon Gergel says the UK has a very  lowly-rated market with an economy that’s performing in line with other countries. Moreover, there is a wide range of valuations with many good companies outside the FTSE 100 in the ‘mid-cap’ FTSE 250 index looking particularly cheap, he says.

This is the second video excerpt from our recent virtual event with Gergel.

You can watch the first one on ‘how cheap the UK stock market is’ here, or, you can catch up with the whole one-hour broadcast here.

Can’t watch now? Read the transcript

Simon Gergel:

What we saw in September was the growth statistics were significantly revised up and it’s quite a hard chart to see here. Essentially, what it’s showing on the left-hand side is that UK economic growth is bang in the middle of the pack in the G7. It looks exactly the same since the pandemic, as elsewhere around the world. In fact, inflation, which did look high and sticky, is now coming down quite sharp. Inflation expectations, which is even more important, are back to normal. So, the UK was perceived to have a worse problem in terms of lower growth and higher inflation. I think that was not really justified and certainly, given the latest data, doesn’t really seem that justified.

So, you’ve got a very lowly-rated market with an economy that’s performing in line with other countries. I think politically, I think the gap between the Conservative and Labour is incredibly tight now and politicians have learnt that the markets really decide what they can do and can’t do. So politically, we don’t see that much risk in the UK either, which is where the UK historically was before the last five or six years.

So just a few more slides. If you break down the UK stock market into buckets of valuation, on this chart the light blue colour, about 15% of the stock market is on a price earnings ratio of over 20. There’s a chunk of the market on quite high ratings and there’s a very large part of the market below ten times earnings, but very little in the middle. So, you’ve got this polarised stock market and if you look at our portfolio, we’ve got two-thirds of our stocks on a single-digit price-to-earnings ratio now, which is really remarkable and very little at the higher end. So, the market is very polarised and we have our portfolio very much at the cheaper end of the market. Of course, price doesn’t equal value, but we think we are buying really good companies, as well as the fact that they are lowly priced.

On the next page, just a list of the new companies we’ve added and companies we’ve completely sold in the last 12 months. I won’t go through this, except to say that the overwhelming feature is where we’ve put most of the new money has been into the mid-cap area, which has been particularly out of favour. When investors sell the UK and don’t want to have exposure to the UK, they really generally mean the mid-cap area, which tends to be a little bit more domestic. Tends to be a bit more cyclical than the large, mega-cap, the mega cap oil companies, or companies like Unilever and so on, which are very much global businesses. The mid-cap area has been particularly out of favour with investors and that’s where we’ve found a lot of the best opportunities.