UK-specific findings include:
- The UK stock market not materially overvalued, in contrast to eight other leading equity markets including the US, Germany and the Netherlands
- The UK’s FTSE 100 bounced back from a poor 2008 with a 22% gain in 2009
- With mining companies leading the way, the UK FTSE All Share Basic Materials Index shot up 106.3% in 2009, taking basic materials from being the worst performing in 2008 to the best performing sector the following year
PwC’s latest report, ‘US and European equity markets’, has revealed that the UK stock market shows evidence of being close to fair value in comparison to eight other leading equity markets. Using the Dividend Growth Model (see under Notes to Editor for brief definition), the PwC team estimates that equities in all nine countries analysed were to a lesser or greater degree overvalued at the end of last year. (see table 1 below)
Table 1- Over/under valuation across countries
| Country | Implied over /under (-) valuation at the end of Q4 2009 |
| US | 45% |
| UK | 6% |
| Germany | 70% |
| France | 50% |
| Italy | 49% |
| Netherlands | 57% |
| Spain | 16% |
| Switzerland | 50% |
| Sweden | 4% |
Sources: PwC analysis
The most overvalued were Germany (70%) and the Netherlands (57%). Of the two largest equity markets by market capitalisation analysed, the US and UK, which together account for 70% of the total capitalisation of the countries studied, the UK does not appear to be materially overvalued; but the US was 45% overvalued, primarily driven by its unusually high price earnings ratio in the fourth quarter of 2009.
To provide a sense check for the data, the PwC economists then recalculated the valuation figures using a lower equity risk premium. This provided a range of possible stock market valuations. (see table 2 below).
Table 2 - Over/under valuation range across countries
| Country | Implied over/under (-) valuation at the end of Q4 2009 |
| US | 24% to 45% |
| UK | -20% to 6% |
| Germany | 62% to 70% |
| France | 35% to 50% |
| Italy | 38% to 49% |
| Netherlands | 46% to 57% |
| Spain | -9% to 16% |
| Switzerland | 27% to 50% |
| Sweden | -31% to 4% |
Sources: PwC analysis
These ranges show that the overvaluation may be less pronounced. But they could still spell trouble for the leading market indices in the US and Europe when the short-term government and central bank measures that are buoying liquidity and global demand are slowly removed in the latter half of 2010.
Yael Selfin, head of macro consulting, PricewaterhouseCoopers LLP, commented:
"While the UK stock market suffered significantly over the course of 2008 than other markets, this analysis suggests that the UK valuations are now in a far healthier state which help provide a degree of stability in what remains uncertain conditions.”
The research also reveals that the UK’s FTSE 100 rebounded from an exceptionally poor 2008, gaining over 22% in 2009 – a pattern reflected in all other European indices analysed by the team. The smallest gain came in the Swiss Market Index (18.3%) and the largest on the Swedish OMX Stockholm 30 Index (43.7%). Meanwhile, the S&P 500, the large-cap US equity price index, recovered in 2009 to post a yearly gain of over 23%.
Yael Selfin, head of macro consulting, PricewaterhouseCoopers LLP, continued:
“These encouraging figures should not lead to an underestimation of the lasting impact of the financial crisis. By the end of 2009, the S&P 500 was still 21% down on its level at the start of 2007, and none of the nine indices we analysed have yet to return to their January 2007 levels.”
The report goes on to reveal that in the UK, mining equities saw impressive gains, while utilities shares languished. In 2009 the sector that saw the biggest gains was basic materials, within which mining companies were the real driving force. The FTSE All Share Basic Materials Index shot up 106.3% over the course of 2009 and went from being the worst performing sector in 2008 to the best performing in 2009. The second highest index increase was in technology stocks, which increased nearly 76%. The only sector closing the year lower than its opening position was utilities, falling 0.7% in 2009.
Yael Selfin, head of macro consulting, PricewaterhouseCoopers LLP, concluded:
“The recovery has been fuelled by the mining sector which is showing extremely strong gains and the technology sector also showing significant improvements on recent years. The challenge will be in maintaining these positions as we move out of the downturn.
“There was strong equity market performance across the main US and European indices in 2009, and as a result there is some evidence at the end of 2009 that the US and central European stock markets may be overvalued. The UK stock market by comparison is close to fair value.
“The second half of the year will see an increased risk of stock prices falling again, as the markets react to the unwinding of the emergency fiscal and monetary measures put in place during the recession.”
