Well Kept Secrets

January 24, 2025
Join my first live webinar: "What's next for 2025?". Reserve your spot here.

Anyone interested in equity markets will be well aware of the overwhelming focus that financial advisors, journalists, and commentators have on the US, especially on its leading index constituents. This is not surprising given how well this market has performed in recent years, both in absolute and relative terms and reflects its now utterly dominant position in global indices. To put this into context, the MSCI World Index covers 2,647 companies from 47 different markets worldwide. Its US constituents now represent 74% of that index, and nine of the largest ten companies in the index are US stocks.

By comparison, the US economy accounts for roughly 25% of global GDP.

This obsession with the US is understandable. However, because it looms so large in investors’ minds, it can obscure the many attractive investment opportunities presented by companies in other less popular markets.

Regular readers of this blog will be familiar with posts highlighting my views about the UK equity market, which I believe is profoundly neglected and undervalued. Many readers will probably be somewhat bored with this storyline and might highlight the fact that despite delivering a decent return in 2024 of just under 10%, this was yet again dwarfed by the S&P’s 23%. Not surprisingly, therefore, in all the new year stock recommendations I have seen, many column inches are devoted to the outlook for the Magnificent 7 and a range of other US technology stocks, which often start with share price charts of the last twelve months’ price performance just to whet investors’ appetites. Charts like these, for example.

However, what might surprise you is that these two charts don’t show the performance of two very exciting (but potentially very expensively rated) US technology stocks. Much more prosaically, the first is a chart of Barclays and the second is NatWest. Both have more than doubled over the last twelve months while also delivering a decent dividend yield and significant share buybacks. So £5,000 invested in either of these stocks would now be worth £10,000 plus the dividends along the way.

What may also surprise you is that these two UK banks significantly outperformed six of the seven constituents of the Mag 7. Only Nvidia performed better over this twelve-month period.

Of course, this is only performance over a year. The Mag 7 have all massively outperformed these two banks over the longer term. But this does show that the US market is not the only repository of good equity returns over all periods.

As to the future, regular readers of this blog will know that I remain cautious about the US market’s overall valuation and especially cautious about the Mag 7. I can find a lot of interesting and attractive individual opportunities in the US market, but because the leading and dominant index constituents look to me to be, at best, fully valued, I would not recommend a passive approach to investing in this market. Indeed, I would recommend an active approach to equity investment in most circumstances, but it’s especially important right now in the case of the US equity market.

As for the UK, given how cheap the market is after many years of poor performance, an index investment approach should deliver decent returns in excess of 10% per year over the next few years. However, a valuation-driven active strategy should be capable of doing much better than this. To help illustrate why, let’s look at Barclays. You might think that after doubling over the last year, it would look pricey now. Far from it, Barclays still looks very undervalued and, remarkably, could double again over the next two years.

I will explain. First, by comparison, let’s look at the valuation of one of the US’s leading banks, JPMorgan. It has performed well over the last twelve months (not as well as Barclays and NatWest), especially in recent months, because, in part, it is seen as a major beneficiary of the economic policies and deregulation Trump will introduce. It trades on a Price-to-Earnings (P/E) ratio of 14x calendar 2025 earnings, just over 2x book value and is forecast to deliver about 15.5% return on equity. Although it is a much bigger business than Barclays, it does many of the same things and, in structural terms, is similar to Barclays.

An investor buying shares in JPMorgan will be purchasing an asset that delivers roughly a 7.8% return (15.5% ROE but trading on 2x book) and delivers a dividend yield of 2%. The business is forecast by a broad consensus to deliver flat earnings in 2025 and 7% growth in 2026.

In contrast, Barclays trades at 0.65x 2025 book value and is forecast to deliver an 11% return on tangible equity this year and about 12% next year. Its P/E is 7x. So, an investor buying shares in Barclays buys an asset generating a 17% return (11% return on equity but trading on 0.65x book) and a dividend yield of 3.3%. The company is forecast by consensus to deliver 16% growth in earnings in 2025 and 20% in 2026.

If Barclays could trade at its prospective book value (half of JPM’s current 2x book value) by the end of 2026—not a stretch, one might assume—or trade on a very modest 11x forward earnings—again hardly a heady rating—it will have doubled again in share price terms and delivered a total return in excess of this.

Based on this, which one would you want to own?

The UK stock market is littered with these sorts of gems, and maybe not surprisingly, after such a long period of poor performance. Some commentators, journalists and asset allocators argue that the UK market has become so irrelevant now that it will continue to suffer from investor apathy and, consequently, remain depressed. In response, I would caution that this apathy didn’t stop a sufficient number of buyers identifying the extremely attractive opportunity presented by Barclays and NatWest over a year ago. My guess is that some investors have also rumbled the fact that both banks continue to present a compelling investment opportunity and will want to buy more.

Maybe you should take a look too.

Author's disclosure

I hold shares in Barclays and NatWest, which are discussed in this article.

Disclaimer: These articles are provided for informational purposes only and should not be construed as financial advice, a recommendation, or an offer to buy or sell any securities or adopt any particular investment strategy. They are not intended to be a personal recommendation and are not based on your specific knowledge or circumstances. Readers should seek professional financial advice tailored to their individual situations before making any investment decisions. All investments involve risk, and past performance is not a reliable indicator of future results. The value of your investments and the income derived from them may go down as well as up, and you may not get back the money you invest.

Related posts

No items found.

Subscribe to receive Woodford Views in your Inbox

Subscribe for insightful analysis that breaks free from mainstream narratives.