One that explains more is liquidity. In the U.K., it is “thin” relative to the U.S. and Europe. French found the average daily volume across the U.K.’s largest companies over a 30-day period last year to be $11 million a day—with only one-third seeing more than $5 million a day. In the EU and U.S., those numbers were $95 million and $443 million a day, respectively.
This matters for the simple reason that lots of large institutional investors around the world work with self-imposed liquidity thresholds. If they aren’t sure they can get in and out of trades reasonably quickly, without moving the price too much, they won’t get in at all. So it might not matter how cheap or attractive U.K. stocks are or become, the big firms won’t be coming in to scoop their shares up.
Sure enough, French finds that the more liquid a company is, the more their earnings per share growth is valued. However, not even this explains the whole discount. There are, says French, no “clinching pieces of evidence that put the U.K. valuation story to bed.” What we have is “insufficient by some distance.”
This is fantastic news for investors. The stock market often does most of our work for us—things that are cheap are cheap for a reason, and we can see what that reason is. But sometimes, there is no reason that fully explains the cheapness. Then, and only then, as the late fund manager Ian Rushbrook put it, “the anomaly becomes an opportunity.”
Well, here we are. With an anomaly that is increasingly looking like a very good opportunity—and a particularly good one for retail investors. Why? Because retail investors don’t need to tick ESG and liquidity boxes before we buy (our trades don’t move markets); we have fewer time constraints; and as we are judged only by ourselves, we need not worry about what might trigger change. All we have to do is ask if what we are buying is too cheap, and if we are being paid enough in dividends to wait for that to change.
And here’s the answer: It is, and we are.
Merryn Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investment. Previously, she was editor-in-chief of MoneyWeek and a contributing editor at the Financial Times.
This article was provided by Bloomberg News.