‘Perfect Result’ for Unsung Stocks: Strategists on U.K. Vote
Strategists and economists were overwhelmingly positive on the prospects for U.K. domestic stocks after the election handed a clear majority and mandate on Brexit to Boris Johnson’s Conservative Party, sending the pound up the most since 2017.
“The U.K. is one of the most unloved and undervalued major stock markets” and with the uncertainty around Brexit receding further, “investors will start to rotate back to the U.K.,” Morgan Stanley economists led by Jacob Nell and Bruna Skarica wrote in a note.
This will drive a significant outperformance for the domestically skewed FTSE 250 against the exporter-heavy FTSE 100. Eurozone equities are set to benefit too, Morgan Stanley said.
Here’s what other strategists and analysts are saying:
Citi, Benjamin Nabarro
The U.K. is likely to see an “economic relief rally” that will boost sterling and risk assets and drive economic confidence. Some delayed investment is also likely to be unlocked.
However, this confidence may fade as the end of the Brexit transition phase approaches and, in particular, if the government does not request a longer transition period by July 1.
Goldman Sachs, Zach Pandl and Sharon Bell
Domestic equities should benefit from a re-rating of growth and lower political uncertainty. “We expect the main beneficiaries of this to be risk-sensitive areas, including small caps, the FTSE 250.”
However, this isn’t the end of the Brexit story: the U.K. government will still have to negotiate new trade deals with the EU and other trade partners, and this may affect domestic assets.
“So while we expect U.K. markets to benefit from a period of reduced uncertainty over the near-term, we will need to re-evaluate this view as the trade talks unfold.”
Barclays, Emmanuel Cau
Disorderly Brexit and Labour government tail-risks being removed gives further upside for the pound, domestics versus exporters and Euro Stoxx 50 versus FTSE 100.
A larger-than-expected majority give legs to U.K. domestic plays’ outperformance, with homebuilders, utilities and real estate likely to be supported the most.
With the result effectively providing a floor to GBP, Barclays expects international U.K. equities to underperform their euro-area peers further into 2020.
JPMorgan Asset Management, Karen Ward
Appetite for U.K. assets should improve materially in the coming days and weeks. Completing the Brexit process remains “a herculean task” that will take considerably longer than the 11 months currently planned, but in the near-term it’s likely U.K. equities will move higher alongside sterling.
BNP Paribas, Paul Hollingsworth
The election result will provide some certainty about the next steps for Brexit “and cements our expectations of fiscal stimulus” in the U.K. in 2020.
A degree of Brexit uncertainty is still likely to persist over the course of 2020 and would only anticipate a “very modest recovery” in growth and for the Bank of England to leave interest rates on hold, BNP said.
“We would expect a Conservative majority to add to the allure of domestically-focused business at the expense of internationally-oriented companies.”
The risk of bus and rail nationalization “would disappear” and a similarly positive impact is likely for water companies. Outsourcing firms are also likely to be boosted by the removal of the threat of a Labour government.
Jefferies, David Owen
“Has Christmas come early? It has if you want to buy U.K. stocks. Utilities, banks, builders and retail dominate our buy list, which includes BT, RBS, Centrica, Persimmon, Greencore, Dart Group, Paragon and Morrisons.”
Meanwhile staples, miners and global industrials are most negatively impacted, like BATS, BAE Systems, IHG and Rentokil.
Markets.com, Neil Wilson
“For the markets and for business this is the perfect result -- a clear majority for the Tories, the Corbyn risk nullified entirely, a major reduction in uncertainty around Brexit and even a quick budget to inject the economy with some added impetus.”
“The only doubts are around the next phase of Brexit -- the future relationship -- but with a large majority the government will be in a better place to negotiate and do what it needs to do.”
Steinbeis & Haecker Asset Management, Markus Steinbeis
“The brief relief and recovery of U.K. stock markets will be followed by disillusionment in a few weeks or months. In the short term, U.K. equities will reduce their valuation gap to other Western European markets, but longer term recession risks will gradually come to light. There is a threat of a significant capital outflows and loss of production capacity.”
©2019 Bloomberg L.P.