French bank Société Générale has told investors to steer clear of U.K. assets and sell sterling, because "zero" reform and political deadlock pose key risks to the country's economy.
"Stay away from U.K. assets into the 7 May elections," the SocGen global asset strategy team, led by Alain Bokobza, said in the bank's 2015 outlook. "In the U.K., 2015 will be marked by the General Election, triggering some volatility and pushing the risk premium on the FTSE 100 higher as the debate on the European Union exit gains momentum."
As such, Bokobza recommended: "Minimal exposure to U.K. assets as political deadlock and delayed tightening by the Bank of England should lead to a weakening of sterling."
This warning comes despite the U.K.'s robust economic growth compared with the euro zone. U.K. gross domestic product (GDP) grew by 0.7 percent in the third quarter on the previous quarter, while the euro zone and France grew by just 0.2 percent and 0.3 percent respectively over the same period.
But the French banking group insisted that U.K. assets remained risky, and had continually underperformed.
"We have been underweight on U.K. assets in the last quarters, with little reason for regret. In particular, U.K. equities are underperforming all developed markets, and a lower GBP/USD is one of our strategic calls (with a 1.50 target)," the bank's asset strategy team said.
"So far there has been zero structural reform and no improvement in twin deficits or exports despite a significant devaluation of the currency. Also, the spillover effects of weak euro zone fundamentals have been underestimated. We are concerned, and therefore seek to protect our asset allocation."
The recommendations are unlikely to be welcomed by the British establishment. Chancellor George Osborne will deliver his Autumn Statement on Wednesday, updating parliament and the public on the government's taxation and spending plans, which are based on the latest forecasts for the U.K. economy from the Office for Budget Responsibility. With the general election just five months away, this is Osborne's last opportunity to outline his economic plans.
Significant political risk in the U.K. came from a rise in euro-skepticism amongst the U.K.'s major political parties, SocGen said. The UK Independence Party (UKIP) , which advocates leaving the EU, has made strong gains of late and Prime Minister David Cameron has promised a referendum on EU membership if his Conservative party wins another term in office. This has prompted widespread concerns about a U.K. exit -- nicknamed a "Brexit" -- from the 28-country political and economic union.
"The elections next year promise to be a rough ride for owners of U.K. assets …We prefer to keep low exposure to U.K. assets going into the elections next year, as we can expect the Brexit referendum theme to make a come-back," SocGen said.
Bokobza also targeted the Bank of England, which is said was continuing its "difficult communication exercise". SocGen does not expect the central bank to start raising interest rates until the third quarter of 2015.
"The market is pricing less and less the rate hike cycle. This may support Gilts at the margin but will continue to weigh on sterling versus the U.S. dollar," Bokobza added.
Looking ahead into next year, SocGen also advised investors to protect against the end of the Fed's zero rate policy, be contrarian on euro zone assets and raise exposure to European banks. And perhaps unsurprisingly, it warned investors to stay away from oil and oil-related assets, given that the price of Brent crude has declined almost 40 percent since June.