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By Emma Wall| 3-29-2018 3:00 PM

UK Banks and Energy Firms Undervalued

Morningstar Investment Management's Mike Coop says investors are wrong to shun UK equities, and outlines exactly where the best bargains can be found

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Mike Coop: On this "Morningstar Minute" we will be talking about UK equities, which of course, are the largest part of people's portfolios.

They've had a bit of a tough time. Performing poorly this year and lagging other markets and they have fallen out of favour. When we look at our own flow data, you can see retail investors are shunning UK equities and institutional investors are also as underweight as they've ever been.

So, should you be following in their wake and also being underweight? Well, when we look at it through a valuation lens, we actually find that UK equity market looks more attractive than most other stock markets. And the reason for this is that actually Brexit, which is the main fear people have, is going to have a pretty limited impact on the earnings of the stock market, because overseas-sourced earnings form the bulk of the earnings.

If you look at the other sectors like banking, they've already been through their tough time in terms of bad loans, recapitalising their balance sheets and getting fines. The energy sector, another big sector, has had to adjust to a lower oil price and they've reduced their cost structure.

So, from an earnings perspective, the UK actually looks better than most markets because its earnings are at a relatively low point, whereas in most other markets it's much higher. So, if you're holding it for 10 years what that means is you actually can get a better return out of UK equities than most other markets. So, despite the doom and gloom, we would think that UK equities are actually a better opportunity than most stock markets and we are favoring them in our portfolios.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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