Every few years the British stock market seems to hit a new low in the eyes of global investors. Right now, we’re living through one of those moments again – and it feels particularly bleak.
The latest Budget landed like a damp squib on an already soggy bonfire. Higher taxes, fiddly rule changes that punish savers, and not a single meaningful measure to make London more attractive for listings or investment. If you were looking for reasons to be cheerful about UK plc, you came away empty-handed.
Yet here’s the funny thing about markets: the worse the mood, the more mispricing tends to appear. When everyone is convinced something is doomed, they stop doing the hard analytical work. That’s when opportunities hide in plain sight.
Why British Shares Look So Unloved Right Now
Let’s not sugar-coat it. Britain has been making a series of unforced errors for well over a decade. Brexit (whatever your politics) removed a layer of certainty. Successive governments have chopped and changed tax rules so often that long-term planning feels pointless. Pension funds have deserted UK equities. The IPO pipeline has almost dried up.
Add in a chorus of international commentators declaring “the UK is uninvestable” and you get the perfect recipe for neglect. The FTSE 100 yields more than 4% and still struggles to attract money. The FTSE 250 – the home of mid-cap Britain – trades on a price-to-earnings ratio that wouldn’t look out of place in the early 1980s.
But neglect is not the same as terminal decline. As Adam Smith once remarked, there is a great deal of ruin in a nation. Britain has world-class companies, deep capital markets, the rule of law, and a language that the whole planet speaks. Those advantages don’t vanish overnight.
The Investment Trust Fire Sale Nobody Wants
If you want the clearest proof that sentiment has gone too far, look at the closed-end fund sector. Many investment trusts – those wonderful British inventions that date back to the 1860s – are trading at absurd discounts to their net asset value (NAV).
We’re talking 30%, 40%, sometimes 50% gaps between what the underlying assets are worth and what the market is prepared to pay for a slice of the trust. Infrastructure, renewable energy, private equity, commercial property – almost every alternative asset corner has been hammered.
Some of these discounts are justified. In commercial property, for instance, some office blocks really are worth less than they were in 2019, and rising interest rates have hurt highly leveraged portfolios. But many trusts are now selling assets at or above the carrying value in their last reported NAV. That tells you the market is being far too pessimistic.
When everyone is running for the exits, the calm investor can often pick up assets for pennies on the pound.
Activists Are Circling – And That’s a Good Sign
Discounts this wide rarely last forever. Specialist buyers – private equity, activist hedge funds, even the trusts themselves via buybacks – eventually step in. We’ve already seen a wave of take-privates and trust wind-ups over the last two years.
In my experience, when the activist vultures start circling, it’s usually means the bottom is not far away. They don’t waste time and money on lost causes. Their involvement is effectively a third-party stamp of approval that the assets are worth more than the current share price.
One trust that has caught my eye recently is a smaller vehicle deliberately positioned to exploit exactly this environment. It’s building a concentrated portfolio of deeply discounted closed-end funds and is willing to push boards to realise value through sales, mergers or liquidations. At its current size it can take meaningful stakes without moving the price too much – the kind of nimble approach that larger players can’t replicate.
Domestic Giants Trading Like Emerging-Market Stocks
It’s not just the trust sector. Many household-name UK companies now trade on valuations more normally associated with risky emerging markets.
- Shell and BP offer dividend yields north of 5% and trade below book value.
- HSBC yields close to 7% if you include special dividends, and its Asian business continues to grow earnings.
- Even consumer giants like Unilever and Diageo – genuine global compounders – sit on single-digit forward P/E ratios.
These aren’t distressed cyclical stocks. They are cash-rich, dominant players in their industries, with balance sheets that survived Covid and the energy shock. The only thing really wrong with them is their postcode.
How I’m Positioning My Own Money Right Now
Personally, I’ve been gradually increasing exposure to UK assets over the last 18 months. Not because I think a sudden re-rating is imminent – these things can stay cheap for years – but because the margin of safety is now wide enough to make the asymmetry compelling.
My preferred route is a mixture of:
- Direct holdings in high-quality large caps with growing dividends
- Carefully chosen investment trusts trading at 30%+ discounts where the underlying portfolio looks robust
- A small sleeve in an activist-oriented fund-of-trusts that can push for change
I’m not betting the house on a UK recovery story. I’m simply taking advantage of prices that already bake in a huge amount of bad news. If sentiment stays sour, I still get paid generous dividends while I wait. If (when?) the mood eventually swings, the capital upside could be dramatic.
Perhaps the most interesting aspect is how little competition there is right now. Most global investors have given up on Britain. That lack of interest is exactly what creates the conditions for outsized returns over the next five to ten years.
Extreme pessimism is uncomfortable, but it’s also one of the most reliable signals in investing. When an entire market is left for dead by the crowd, it’s usually worth taking a closer look.
The UK isn’t perfect. Far from it. But at current valuations, perfection isn’t required – decent is more than good enough.
This article represents my personal opinions and is not investment advice. Always do your own research and consider seeking professional advice before making investment decisions.
