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JPMorgan turns bullish on UK stocks for first time since Brexit vote


A woman walks past JPMorgan Chase & Co’s international headquarters on Park Avenue in New York.

Andrew Burton | Reuters

LONDON — JPMorganThe bank has upgraded U.K. stock to “overweight” and ended years of caution about British equity markets, which it said were trading at an “record-low” price.

Since 2016, Wall Street’s giant held a steady cautious view on U.K. shares. Then, in July 2020, after an especially bad spell in U.K. stocks as well the worsening coronavirus pandemic, the Wall Street giant moved to “neutral”.

U.K. equity has delivered an improved performance over their European counterparts in the last 12 months. JPMorgan however on Monday elevated them to overweight both within a European context and globally.

Since Brexit referendumIn a research note, Mislav Matejka, Head of Global Equity Strategy at JPMorgan, highlighted that U.K. equity has trailed the U.S. by 50% cumulatively and 24% for the euro area.

JPMorgan’s combined data shows that the U.K. is offering a “record” discount relative to other areas, both price-to earnings and price-to book. Both the former and the latter are used to determine the stock’s market value relative to financial results.

The discount holds even when value sectors — those which generally trade at a discount relative to their financial fundamentals — are taken out.

“In the U.K. we had a longstanding preference to FTSE 250 vs FTSE 100For more information, please visit:
Exporters vs. domestic. Matejka stated that FTSE 100 is now likely to perform more well.

Matejka’s group is financing the upgrade by decreasing its exposure to Japan. To maximize on the catch up trade, they selected 25 U.K. stock stocks. They include high-profile names like BP Barclays Jupiter Fund ManagementAnd Vodafone

Diverging fortunes

JPMorgan’s U.K. overweight is a continuation of a long-standing view held by European equity analysts at British counterparts Barclays, who are also overweight the large cap FTSE 100 for its export-heavy composition, but underweight the more domestically-weighted FTSE 250.

Credit Suisse echoed this decline in faith in small-cap domestic stocks on Tuesday, dropping U.K. small caps below weight while increasing their U.S peers to overweight.

Credit Suisse strategists noted in a research note that U.K. Small caps are less cyclical and more domestically-oriented than larger caps. Yet, U.K. large caps have not responded to U.K. PMI declines, suggesting there could be more work ahead. Credit Suisse also stated that British small caps now price at a PMI of 62, compared to 57% currently.

The UK is facing a variety of supply-side problems with a central bank that is more hawkish, which may lead to GDP projections for next year being under greater downward pressure than other countries.

Credit SuisseIt was highlighted that British small caps perform poorly when it comes to performance. sterlingFalling credit spreads are being discounted, which is what strategists consider “unlikely.”

They added that “despite these risks, small cap continues to trade at an extremely large valuation premium over large caps vs its history.”

Steve Brice, Chief Investment Officer at Standard CharteredCNBC’s last week interview with Jeremy, revealed that Bank of England was concerned about whether it would react too strongly to the persistently high level of inflation in the United Kingdom. The Bank of England now believes the rate will be 5%.

Last week the central bank held off on increasing interest rates. Instead, it decided to evaluate labor market data and wait for the conclusion of U.K.’s furlough programme. Markets expect an immediate hike.

Brice explained that while supply issues are evident worldwide, these problems have been mitigated in the U.K. as a result of Brexit. So, this market is not our preferred one from an equity markets perspective.

Because of these policy risks, “It is actually our least favorite market, if anything.”