Five years since the Brexit referendum the UK equity market is finally worth buying (at bargain prices), that's according to JP Morgan.
The American bank’s analysts in a note today said that London’s equities are at record discounts compared to the world’s other financial centres, having lagged those listed in the United States by some 50% since the referendum in 2016, and over the same period trailed some 24% behind the Eurozone.
JPM was until last July was broadly ‘short’ UK shares during what the bank described as a “brutal spell of performance” as COVID-19 and dividend cancellations piled on top of a post-Brexit malaise. The bank now lifts what was a ‘neutral’ call on the London market to ‘overweight’ and has started to unwind its “longstanding cautious call” on UK equities
“We now think the FTSE 100 could perform better,” JPM analyst Mislav Matejka said in a note, adding that JPM has long held a preference for the broader FTSE 250 index, and, has preferred domestic names over London’s exporters.
Matejka noted: “UK is still trading as a low beta with respect to global market direction and has low beta to PMIs.
“We stay bullish on the overall market direction, but note that big up moves in PMIs and in equity prices have largely happened in the past 12-18 months. A traditional inverse correlation to GBP has weakened, but should still hold. Our FX team expects GBP to move lower, which would be a tailwind for exporters.”
The Bank of England is about to start hiking interest rates but Matejka says JPM doesn’t see this as a problem for the UK market direction as they don’t believe the BoE is likely to keep moving ever more hawkish. Additionally, the analyst noted that concerns over labour supply and power prices could be easing (for example UK gas prices are already down 35% from the October highs, the analyst added).