Are UK equities about to shine?
The UK is a ‘buy’ is fast becoming the consensus view. As per Goldman Sachs yesterday, chiming views expressed here in recent weeks, UK equities are due to catch up. Analysts at vampire squid expect a free trade deal with the EU and “substantial room” for a strong economic rebound in 2021, as activity remains depressed and the UK is well-positioned for vaccine distribution.
Both should support GBP and UK domestic stocks, whilst they do not see a move up in sterling on a Brexit breakthrough as a signiﬁcant barrier to FTSE 100 performance. Back to the strong pound = strong UK equities correlation of old. Meanwhile, the FTSE 100 has an expected 2021 dividend yield of 4%, making it the most attractive among developed market stock indices.
UK equities have trailed peers of late and the investment bank expects a further bounce relative to European shares assuming a trade agreement. And whilst UK domestic stocks have re-rated, they still trade at about a 10-15% P/E discount to the broad European market. Against the US, UK equities trade at a 35% discount based on a 2-year earnings outlook. Assuming a strong, vaccine-led recovery next year, they reckon this offers good value. Basically, the UK’s cyclical and value bias (a third of the FTSE 100 with virtually no tech) makes it well placed to benefit from a global recovery in 2021.
MSCI All World Index vs FTSE 350: UK due to catch up?
Good news, then, that the UK has rushed to be the first country to approve the use of Pfizer and BioNTech’s vaccine. Jabs will start in the coming days, with 800,000 doses arriving in the UK shortly. The FTSE 100 was flat even as European peers dipped in early trade, after a strong run-up in yesterday’s session took the blue chips back to 6,400. US futures were a little weaker after another strong day on Wall Street saw the S&P 500 rose over 1% to a new record, with the Nasdaq also setting a fresh all-time high. US 10-year yields spiked to 0.93% and stayed nicely within the rising channel – what will happen if it breaks 1%? A bipartisan group of lawmakers brought forward a new $908 billion stimulus plan in an effort to break the legislative torpor in Washington, whilst Jay Powell continues his testimony in Congress later today.
Staying on UK equities, Deutsche Bank this morning raised its price targets on British banks, catching up with the recent rerating, whilst retaining a cautious view on the sector. It warned that the cost of collecting on the coming wave of non-performing loans together with Covid recovery costs challenge potential efficiency gains for UK banks next year. Barclays, Standard Chartered and Virgin Money, the investment bank notes, are more “prescriptive and conservative on guidance”, so don’t need much by way of efficiency gains to avoid downgrading forecasts. On the other hand, consensus expectations for HSBC, NatWest and Lloyds “[are] more difficult to achieve”. Deutsche also closed its ‘sell’ call on Standard Chartered.
Brexit talks drag on – Barnier reportedly told EU envoys that the three main obstacles to a deal persist: fishing, level playing field and governance. GBPUSD continued to chop around the 1.33-34 region. Still expect a deal in the coming days – GBP crosses will be increasingly sensitive.
EURUSD broke out to its best level in almost three years as the bulls pushed the pair over 1.20 and sustained the move. Not a huge amount of resistance in the way of 1.25. The rally saw the US dollar index make fresh lows as the weaker dollar story is still playing out. Dollar down, equities and yields higher is the widely-held consensus view…what if everyone has this view?
Oil fell as doubts lingered about the OPEC+ production deal and a report showed US domestic stockpiles rose sharply. The API figures on Tuesday showed inventories rose by 4.15m barrels last week, adding to pressure on prices amid signs OPEC and allies are not all on the same page with regards delaying a planned 2m bpd increase in production in January. WTI (Jan) dropped below $44 but has pared losses to trade around the $44.50 mark this morning.
Gold firmed – that real yield correlation reasserted itself and dip buyers came in post-Thanksgiving.