JPMorgan turns bullish on UK shares for first time since Brexit vote


A woman walks past JPMorgan Chase & Co’s international headquarters on Park Avenue in New York.

Andrew Burton | Reuters

LONDON – JPMorgan has upgraded UK stocks to ‘overweight’, ending years of caution in UK equity markets which the bank said are now trading at a ‘record discount’.

The Wall Street giant had held a long-standing cautious call on UK stocks since the 2016 Brexit referendum before switching to neutral in July 2020 after a particularly dire period for UK stocks and the worst of the coronavirus pandemic.

However, as UK stocks had outperformed their transatlantic and European peers over the past 12 months, JPMorgan raised them to overweight in both European and global contexts on Monday.

Since the Brexit referendum, British stocks have lagged the US by a cumulative 50% and the euro zone by 24%, said Mislav Matejka, Head of Global and European Equity Strategy at JPMorgan, in a research note.

JPMorgan’s aggregated data showed that the UK achieved “record discounts” on other regions on both a price / earnings and price-to-book basis. The former helps determine the market value of a company’s stock relative to its financial results, while the latter is relative to the book value of the company’s equity.

The discount applies even if value sectors – those that are generally trading at a discount to their financial fundamentals – are excluded.

“Within the UK we have long had a preference for FTSE 250 over FTSE 100 and for
Domestic vs. Exporters. We now believe that FTSE 100 could do better, “said Matejka.

Matejka’s team is funding the appreciation by reducing its exposure to Japan and selecting 25 UK stocks to best capitalize on the catch-up business. This includes such high profile names as BP, Barclays, Jupiter Fund Management and Vodafone.

Diverging fates

The new overweight position in JPMorgan in the UK follows a longstanding assessment of European equity analysts at British rival Barclays, who also overweight the large cap FTSE 100 due to its export-heavy composition, but underweight the more domestically weighted FTSE 250.

That dwindling confidence in domestic small-cap stocks was confirmed Tuesday by Credit Suisse, which trimmed UK small-caps to underweight and increased its US counterparts to overweight.

“UK small caps are much more cyclical and domestic than large caps, yet UK small caps have barely reacted to the decline in UK PMIs (purchasing managers’ index), which could well go further,” said Credit Suisse strategists in a Research Note, adding added that UK small caps are pricing in a PMI of 62, down from 57 today.

“The UK faces a number of idiosyncratic supply-side challenges with a more restrictive central bank, which could put next year’s GDP projections under more pressure than in other regions.”

Credit Suisse noted that UK small caps often do poorly when the pound sterling falls and currently appear to be anticipating a decline in credit spreads that strategists see as “unlikely”.

“Despite these risks, small caps continue to trade at a very high valuation premium over large caps compared to their history,” they added.

Steve Brice, chief investment officer at Standard Chartered, told CNBC last week that the bank’s main concern about the UK equity market is whether the Bank of England will “overreact” to persistently high inflation, which is now at 5%. is expected.

The central bank held back on an expected rate hike last week and decided to wait and evaluate the labor market data after the UK vacation program ended. However, the markets by and large expect an increase to come.

“Of course there are delivery bottlenecks worldwide, but they will also be alleviated in the UK by Brexit, so that it is not a preferred market for us from a stock market perspective,” said Brice.

“If we look around the world today, this is our most unpopular market because of these political risks.”