LONDON — With eight months to go until Britain officially leaves the European Union, there is still no sign of a deal being struck between the two sides. Progress is so slow that many are now speculating that no deal will be reached and the UK could drop out of the bloc with no fallback option of any sort.
That speculation, however, hasn’t stopped Barclays from arguing that British stocks could make investors a killing going forward. In a note circulated to clients on Monday, Barclays said that it sees value across the whole of Europe, but particularly in the UK, for a number of reasons.
Updating its European equity strategy, a team from the bank led by Emmanuel Cau said investors in Europe should „hold their nerve” because the market still has further to rise, before specifically picking the UK as a buying opportunity.
Cau and his team, which includes analysts Sarah Wilkinson and Magesh Kumar Chandrasekaran, identified five reasons for their confidence in European stocks, which are as follows:
- „Barclays forecasts global GDP growth to stay resilient at around a 4% pace and developed market activity to stabilize following a soft H1, despite the potential drag from trade.”
- „Earnings are healthy and elevated margins coupled with strong pricing power provide some cushion against higher input costs associated with tariffs,” while results in the second quarter were „reassuring.”
- „P/E multiples have de-rated to mid-cycle levels and the yield gap still favours equities over bonds.”
- „Investors have de-risked, sentiment is cautious and Q4 seasonality is positive.”
- „Foreign exchange markets are „turning into a tailwind again for the Eurozone and UK.”
Turning to the UK, Cau and his team identified the continued weakness of the British pound thanks to uncertainty over Brexit as a reason for buying UK-listed stocks. After a rollercoaster two years, the pound is around 11% lower against the dollar compared to its pre-referendum level, and is currently trading at $1.31.
„We are overweight UK equities within our Pan-European coverage universe,” they wrote.
„The region has underperformed the global benchmark by 30% since 2012 and appears to be a consensus underweight. Relative to the rest of Europe, UK stocks have stabilised recently.”
Part of Barclays’ argument is couched in the fact that a weak pound tends to mean a strong UK stock market. That is because it is heavily skewed towards companies that don’t actually make their money in the UK. This phenomenon was witnessed in the months after the referendum when UK stocks hit record highs numerous times as the pound continued to weaken.
The FTSE 100 index, for example, contains miners, oil firms, and pharmaceutical giants, with around two-thirds of all revenues for companies on the index derived from abroad, meaning a weak pound makes them more profitable.
„We advise going long UK stocks, but FX hedged. There is indeed a clear negative correlation between the relative performance of UK equities and GBP historically,” Cau’s note said.
„A weaker GBP is thus a positive for UK large caps’ earnings and could lead to an uptick in EPS revisions ahead,” he continued, pointing to the chart below:
The pound’s weakness is not over yet, Cau and his team say, citing the work of their colleagues in forex strategy. That means a possible further boost for UK stocks, making them an even more attractive investment.
„Our FX strategists expect further weakening in the pound over the coming months, partly due to their bullish view on the dollar but also because of the Brexit uncertainty,” the note said.
„GBP has already fallen a lot since the EU referendum two years ago, but the current political deadlock does not inspire confidence as we approach the March 2019 deadline, in our view.”