Stay bullish on UK domestic stocks, says JPMorgan
By Michele Maatouk
Date: Monday 27 Jan 2020
(Sharecast News) - JPMorgan Cazenove recommended that investors stay bullish on UK domestic plays on Monday but underweight the FTSE 100.
In particular, JPM highlighted a preference for housebuilders, domestic banks, real estate and retail.
The bank said it continues to prefer the domestically-focused FTSE 250 to the FTSE 100.
"The group is likely to benefit from the expected inflection higher in UK dataflow - housing, consumer confidence and business confidence. These have been under pressure for the best part of three years and now offer favourable base effects, as well as some pent-up demand," it said.
"Despite the stronger showing over the past few months, UK domestic plays remain much more attractively priced than the exporters are."
On a price-to-earnings metric, JPM noted that domestic stocks are trading at nearly 20% discount to exporters and have double the dividend yield, at 4.8% versus 2.4%.
JPM said it does not expect a potential rate cut from the Bank of England to hurt the relative performance of domestic shares. A rate announcement form the BoE is due this week.
"JPM's call is that the cut will not happen, but even if it did, any policy easing could be seen as bullish for UK domestic activity," it said, pointing out that housebuilders and real estate typically outperform the market in the aftermath of BoE rate cuts.
JMP said it remained 'underweight' UK equities in the regional context.
"UK equities are low beta to global indices, they are inversely correlated to bond yields direction, and they are inversely correlated to GBP, which is not far from 40-year trade-weighted lows. Finally, we do not find the UK to be as under-owned as the consensus believes.
"At the global equity level, we remain constructive. We acknowledge that the latest health scare is likely to worsen before getting better, which could lead to more significant near-term de-risking, but we note that past outbreaks have tended to drive only limited market falls."
Health scares, like localised war campaigns and terrorist incidents, were historically buying opportunities, rather than the reasons for sustained selling, it said.
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