UK stocks may be the world’s cheapest, but the wall of issues facing the market means they still aren’t appealing enough to buy, according to a BlackRock strategist.
(Bloomberg) — UK stocks may be the world’s cheapest, but the wall of issues facing the market means they still aren’t appealing enough to buy, according to a BlackRock strategist.
“The more the Bank of England hikes rates, the more damage it’s going to do for growth, the more damage it’s going to do for the consumer. And that’s going to show somewhere, it will show in the earnings,” Karim Chedid, head of EMEA iShares investment strategy, said in a phone interview. “It’s a cheap market, but we’re not running, we’re not overweight despite the cheap valuations.”
UK equities are the worst performers among major European and developed markets this year as the country increasingly looks like an outlier in the global fight to quash high inflation, spurring continued hawkishness from the Bank of England and fueling fears of recession. The FTSE 100 Index is trading at a discount of about 50% to both the S&P 500 and the MSCI All-Country World Index, the widest since at least 2005, when Bloomberg began compiling the data.
“There’s still some room for further pain in UK earnings, especially in the consumer sectors,” said Chedid. “The growth-inflation trade-off in the UK is starker than anywhere else in terms of the trade-off that’s facing the BOE.”
Data today showed that the UK economy shrank less than expected in May, further adding to concerns that the central bank has more hiking to do. Sentiment around the UK economy is so poor that the nation’s stocks and credit are now the cheapest globally, Morgan Stanley strategists said earlier this week.
BlackRock Investment Institute strategists are underweight UK equities on a six to 12-month tactical view, but are neutral on UK gilts. UK government bonds have fully priced in the higher-for-longer rates path, according to Chedid.
In the UK equity space, BlackRock prefers the internationally-exposed FTSE 100 to the FTSE 250 because they’re more concerned about the domestic demand situation, said Chedid.
–With assistance from Sagarika Jaisinghani.
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