U.K. Stocks May Be Your Shock 2019 Winner, Morgan Stanley Says

(Bloomberg) -- Are U.K. stocks a or a trap? For Morgan Stanley, the answer is the former.

“Although Brexit uncertainty makes it hard to envisage the U.K.” as the best-performing developed market in 2019, “there are still enough compelling reasons to be overweight,” strategists led by Krupa Patel wrote in a note. “The key reason is that the U.K. is very cheap and unloved.”

Since the Brexit referendum in mid-2016, British shares have trailed global markets in dollar terms amid persistent uncertainty over the future of the country’s ties with the European Union. The political drama only intensified this year, as Prime Minister Theresa May struggled to reach a deal with the EU that can also win over Parliament as the March departure from the bloc looms.

Strategists are split on whether U.K. stocks are cheap enough to outperform in an environment of immense political uncertainty. Sanford C. Bernstein calls the market “uninvestable,” while Citigroup Inc. says investors have offloaded British stocks aggressively already.

Morgan Stanley’s stance would put it closer to the Citigroup camp. The brokerage adds that U.K. stocks benefit asymmetrically from the pound, since sterling weakness boosts earnings while appreciation drives inflows and valuation re-rating.

But it’s not like Brexit is entirely out of mind for the strategists. They recommend buying domestically focused British stocks versus exporters -- but only if political uncertainty fades.

©2018 Bloomberg L.P.