Sentiment around the UK economy has been so poor that the nation’s stocks and credit are now the cheapest globally, which could create investment opportunities if inflation begins to slow down, according to Morgan Stanley strategists.
(Bloomberg) — Sentiment around the UK economy has been so poor that the nation’s stocks and credit are now the cheapest globally, which could create investment opportunities if inflation begins to slow down, according to Morgan Stanley strategists.
“Investor pessimism towards the UK is currently high; however, sentiment could shift if inflation starts to subside,” strategists led by Graham Secker said in an emailed note.
While UK assets have been offering relatively attractive valuations for some time, in the context of the last 20 years, UK equities and corporate bonds are the cheapest global assets, according to Morgan Stanley.
UK equities are the worst performers among major European and developed-market stocks this year as high inflation pushes the Bank of England to remain hawkish, fueling recessionary fears. Traders have ratcheted up bets that interest rates will rise to their highest level in 25 years as they question officials’ ability to tame inflation without hobbling the UK economy.
Morgan Stanley strategists don’t expect UK large caps to outperform global peers over the next few months because of weaker earnings trends and outperformance of growth stocks. But they say that UK mid and small-cap equities look cheap and would be attractive if inflation starts subsiding and lifts economic sentiment. While risks are skewed toward more Bank of England monetary tightening beyond the 5.5% terminal rate, for now Morgan Stanley strategists aren’t forecasting a recession.
“The risks are rising, however, with a likely challenging autumn ahead,” they wrote.
Morgan Stanley’s top stock picks in the UK with the most attractive bull-bear price target skew include BAE Systems Plc, Ashtead Group Plc, 3i Group Plc, BP Plc, Smith & Nephew Plc, Haleon Plc, Prudential Plc, Rio Tinto Plc, AstraZeneca Plc, Indivior Plc, Segro Plc and SSE Plc.
In the meantime, Citigroup Inc. strategists cut UK equities to neutral today, citing damage to exporters from the stronger pound and the market’s lack of exposure to growth sectors. At the same time, they added that UK equities’ international tilt should provide a buffer for the market as the domestic economy likely slips into a recession next year.
(Updates with Citi strategists in last paragraph)
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