The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. REUTERS/Toby Melville
Britain’s shares are near “record cheap” levels as they have lagged their global peers since the Brexit vote, J.P. Morgan said on Monday, boosting its rating of UK stocks.
The brokerage upgraded UK stocks to “overweight” from “neutral”, meaning it believes these stocks should perform better in the future.
UK stocks have lagged U.S. and Eurozone counterparts by a cumulative 50% and 24%, respectively, since the Brexit referendum in 2016, J.P. Morgan said, noting a “record discount” in their valuations relative to other regions on a price-to-earnings and price-to-book value basis.
The UK, the world’s fifth largest economy, has been grappling with an acute shortage of critical workers as well as massive supply chain troubles, although projections for economic growth have been improving.
“Some argue that the higher representation of value sectors, including financials and commodities, explains this significant valuation gap,” analyst Mislav Matejka wrote in a note. However, even fully excluding these sectors the UK market looks near record cheap.”
While the S&P 500 (.SPX) has climbed 25% so far this year and the MSCI’s gauge of stocks across the globe has risen 17%, London’s FTSE 100 (.FTSE) has advanced 13%.
UK stock trading in relation to certain macroeconomic variables appears to be evolving, Matejka added. “UK has historically exhibited a clear inverse correlation to bond yields direction, but that is not the case anymore.”
The UK also offers high dividend yields, Matejka said, adding that a potential Bank of England interest rate hike “should not be a problem” for the FTSE 100.
Credit Suisse downgraded UK small cap companies to underweight last week, saying their higher valuations compared to large caps were unwarranted due to lower expectations of manufacturing and economic growth.