You’ve been down too long.
That is the latest view from JPMorgan Chase & Co. analysts on U.K. stocks, as the bank ended a longstanding cautious view on the region, upgrading it to overweight. A team led by Mislav Matejka, head of global equity strategy, explained why investors should be ready to take advantage of the fact the FTSE 100
has lagged behind its global peers for six years.
U.K. equities have trailed a cumulative 50% against the U.S. and 24% versus the eurozone since the Brexit referendum in 2016, opening up a record discount both on price to earnings and a price to book basis, said Matejka and the team. That is even after stripping out heavily weighted banks and energy sectors.
And while U.K. equities have historically shown a “clear inverse correlation to bond yield direction,” that is no longer the case. “The 2-year rolling correlation between UK relative performance and bond yields has flipped into positive territory. This suggests that any potential increase in bond yields may not be a constraint for the relative performance of UK equities,” said Matejka and the team
Neither should it be a problem that the Bank of England is also about to start raising interest rates, as increasingly hawkish policy won’t continue to be the case. Also J.P. Morgan sees an easing of pressures over labor supply and power prices, with gas prices down 35% from October highs.
As for their preferences, they are switching a long-held preference for FTSE 250 stocks over the FTSE 100, as they think the latter, with its big representation of exporters, could perform better. And the U.K. offers the highest dividend yield out of all regions, the researchers note.
As for Monday’s action, the FTSE 100 was flat at 7,300, with pharmaceuticals gaining and banks and miners weaker. Travel stocks failed to get a bid from the reopening of trans-Atlantic travel routes for fully vaccinated foreign travelers. Shares of International Consolidated Airlines
fell 2% and easyJet
shares fell 1.7%.
The British pound
rose 0.4% to $1.3548.