Buy British shares, says Goldman Sachs

An American investment banking giant has told clients to invest in London-listed stocks after what it called “over a decade of persistent underperformance”.

Goldman Sachs said it recommended both the FTSE 100 and the FTSE 250, pointing out that both indexes had performed well versus global rivals this year. 

In a research note to clients, Goldman analysts said that the FTSE 100 benefited from a dividend and share buyback yield of 6pc.

It also offered investors a “good diversification from the concentrated and tech-heavy S&P 500”.

Goldman analysts said that every industry sector on the FTSE 100 “trades on a discount”.

They said: “Domestic investors have a low propensity to allocate to UK equity. We argue that this has pushed down valuations and has created a backdrop where managements seek to re-list abroad, take the company private or aggressively buy back shares.

“While these strategies are likely to continue – and themselves provide a floor to valuations – we think policy-makers are increasingly acknowledging that this is not healthy for the economy.”

The analysts said that the so-called “mid-cap” companies in the FTSE 250 “also trade on a low valuation and, in addition, are exposed to improved UK economic momentum, pent-up demand from high household savings levels and falling interest rates”.

They added: “Supply-side reforms in areas such as home building should also be supportive. Furthermore, a strong pound favours [the] FTSE 250.”

The endorsement comes after years of hand-wringing in the City over the poor performance of London-listed stocks.

The analysts said: “We think three factors explain the persistent underwhelming returns: (i) the absence of a large listed tech sector, (ii) a politically turbulent period for the UK post the 2016 EU referendum, and (iii) a lack of domestic investors willing/able to put money into home-grown stocks.”

But, despite the difficulties, the analysts concluded: “We continue to recommend FTSE 250 vs. MSCI World [investing in a global index fund]. We also like FTSE 100 for its low valuation, buyback, and diversification characteristics.”

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