New Chancellor Jeremy Hunt's mini-mini-Budget announcement has created a short-term buying opportunity for a handful of London-listed stocks, according to strategists at Liberum.
Running a stock market screen for those shares that would benefit most, Joachim Klement and Susana Cruz pointed out Vistry Group PLC (LSE:VTY), Rightmove PLC (LSE:RMV) and Mitchells & Butlers PLC (LSE:MAB) in particular, all of which are rated 'buy' by the broker's sector analysts.
They noted that Hunt's cunning stunt in his new role of "Acting Prime Minister", has resulted in "the mother of all U-turns" to reverse essentially all measures of the mini-budget announced by his predecessor on 23 September.
This has had the effect of sparking a small rally in sterling and a further drop in gilt yields.
"We see this as a major positive to calm markets down and expect gilt yields to decline further in coming weeks," the pair said in a note to clients on Tuesday.
A short-term rally in stock markets, particularly in sectors like homebuilders, real estate and utilities is expected "though it will likely be limited in duration", Klement and Cruz said.
The stabilisation of gilts and sterling should lead to "attractive opportunities" in the UK equity market, which they noted trades at a significant discount to US markets, even if adjusting for differences in sector composition.
London stocks are currently on a price/earnings (PE) discount of 28% versus a long-term average of 16.7%, while sterling remains 3% cheaper than a month ago.
While gilt yields will remain elevated in the short-term, the Liberum strategists said once the official new-new Budget is delivered on 31 October, along with an assessment by the Office for Budget Responsibility, they expect 10-year gilt yields to return to 3.5% the levels seen before the mini-budget.
"This should trigger a substantial lift in share prices of sectors that have high negative beta with 10-year gilt yields."
The sectors with the largest recovery potential are homebuilders, followed by real estate and then utilities, while defensives like beverages and grocery stores should underperform, they said.
As well as brickmaker Ibstock PLC (LSE:IBST) and real estate investment trusts Urban Logistics REIT PLC (AIM:SHED), Workspace Group PLC (LSE:WKP) and Primary Health Properties PLC (LSE:PHP, OTC:PHPRF), the strategists also noted that retailers have a high beta to 10 year gilts.
"Some retail stocks like Next PLC (LSE:NXT) or leisure stocks like Mitchell & Butlers are also worth a look"," they said.
But in the medium term, the pair do not see the bounce in equities and gilts having legs beyond November/December.
"The reason is that markets are still in the process of fully pricing in a recession in the UK and the Bank of England will have to continue to hike rates significantly into year-end," the Liberum strategists said.
While the City consensus currently expects FTSE 100 earnings to grow by 58% in the next 12 months, while FTSE 250 earnings are expected to grow by 1.7%, Klement and Cruz see earnings declining by around 25-30% in the coming 12 months based on an analysis of their early-cycle indicator.
"There clearly is a lot of room for analyst downgrades, though small- and mid-cap stocks will likely outperform as analysts have priced in more downside there than in the FTSE 100," they concluded.