LONDON (Reuters) - British equities, the trade that ticked every box at the start of 2021, so far haven’t delivered the returns investors had hoped for, yet few are giving up hope that equity outperformance will follow as the UK economy starts to re-open. Britain this week started easing stay-at-home lockdown orders while much of Europe, including Germany and France, contend with a third wave of COVID-19 infections and hospitalisations. Britain’s non-essential retail and outdoor hospitality settings will re-open after April 12. The country has been swiftly vaccinating its population for months, one reason investors were drawn to UK blue chips. The FTSE index is also full of the mining and energy companies that tend to benefit at the start of a new economic cycle, and the election of U.S. President Joe Biden in November promised to bring massive spending stimulus. That persuaded fund managers to rotate portfolios towards assets that thrive during higher growth and inflation and UK blue chips seemed a good fit. Except it hasn’t worked out that way. Germany’s DAX and Wall Street’s S&P 500 have set a string of records. But Britain’s FTSE 100 spent the entire first quarter 10% below its pre-COVID 19 highs. It also has failed to reclaim the 7,000-point milestones above which it traded for most of the three years before the pandemic. “It’s quite perplexing”, said Gavin Launder, head of European equities at Britain’s Legal & General Investment Management (LGIM). A number of factors are a play, he says: post-Brexit trade and diplomatic frictions with the European Union, the harsh lockdown and travel restrictions imposed at the turn of 2020 and the poor run of a number FTSE heavyweights such as consumer staple group Unilever. Other analysts point out to political uncertainty linked to a possible referendum on the independence of Scotland and plans to raise corporate tax. On the bright side, years of underperformance against European and U.S. stocks since the Brexit referendum mean British shares have a very sought-after quality. “VERY, VERY CHEAP” “The UK is in very, very cheap territory”, said James Henderson, director of UK investment trusts at Janus Henderson. Shares of FTSE 100 companies trade at 14.2 times their forward earnings, versus 17.9 for the euro zone blue chips of the EURO STOXX 50 and 19.5 for global equities in the MSCI AC World Index. For Henderson, the low valuation is a compelling argument to buy. “I see UK assets as a buying opportunity and I’m increasing the borrowing in the investment trusts that I run”. Their cheapness aside, there’s a lot going for British assets: the progress of UK vaccinations, with about 45% of the population getting a first dose - about four times more than the EU - sets the ground for re-opening the economy faster than on the continent. The UK took one of the worst economic hits from the pandemic -- national output fell 9.9% against 6.8% for the euro zone. Its recovery in 2021 and 2022 is therefore expected to be stronger and bring momentum to its stock market. LGIM’s Laudner said his clients are also increasing their exposure to the British economy and he believes the bet on UK equities may very well unfold in the second half of the year. A business survey on March 24 showed that a rush of new orders in anticipation of COVID-19 restrictions liftingn had prompted a much stronger rebound for British companies than expected. And that in turn is increasing demand for equities. “We’re seeing pent-up demand for both UK stocks and sterling and that’s driving both up together and is likely to continue over the next few months”, said Jeffrey Sacks, head of EMEA investment strategy at Citi Private Bank. For Jen Causton, an investment manager at Liontrust Asset Management, patience is the key in what remains a recovery story in the making, backed by generous shareholder payouts, with a dividend yield of 3.1%. “I don’t think anything’s gone wrong. We need to wait a little”, she said. “The fundamental building blocks for the UK to outperform are still in place”. Graphics: UK equities still very cheap compared to global peers -