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Why UK equities might be the best ship to sail through Brexit

  • There are three reasons increasing the attractiveness of U.K. stocks: global valuations are too high, U.K. valuations are cheap and they're affected by global growth

  • The global economy is seen increasing by 3.5 percent this year and by 3.6 percent in 2018.
A Union flag flies near the Elizabeth Tower, commonly referred to as Big Ben, at the Houses of Parliament in central London on March 29, 2017.
Justin Tallis | AFP | Getty Images
A Union flag flies near the Elizabeth Tower, commonly referred to as Big Ben, at the Houses of Parliament in central London on March 29, 2017.

The FTSE 100 might be your best investment option amid growing domestic volatility in the U.K. economy, analysts at JP Morgan said.

There are three reasons increasing the attractiveness of U.K. stocks: global valuations are too high, U.K. valuations are cheap and they're affected by global growth, which looks solid at the moment.

"Despite popular skittishness, U.K. valuations actually look very good," James Illsley, fund manager at JP Morgan U.K. Equity Core fund, said in a note to investors.

"The market itself is cheap. Valuations are actually about 20 percent below long-term averages, on a cyclically adjusted price-to-earnings ratio. And more importantly in practical terms, U.K. equities look a relative bargain compared to cash that yields virtually nothing and bonds that are yielding less than 1 percent," Illsley pointed out, adding that the average dividend yield is about 4 percent.

The FTSE 100 registered its biggest daily gain since April in mid-July. In May, the index broke two new highs surpassing the 7,500 mark on a weaker pound. The drop in the currency has supported British stocks, given that in most cases these companies make their profits in dollars.

As a result, U.K. stocks are mostly affected by global growth dynamics rather than by the British economy, which has been volatile due to the uncertainty surrounding its future relationship with the European Union.

The International Monetary Fund revised downwards its growth forecasts for the U.K. whereas it kept its global outlook unchanged. The IMF said Monday that the U.K. is set to grow 1.7 percent in 2017 and 1.5 percent in 2018.

Meanwhile, the global economy is seen increasing by 3.5 percent this year and by 3.6 percent in 2018.

According to Illsley, the attractiveness of U.K. equities should therefore remain intact. "In terms of valuations I can't see the case being eroded," he told CNBC Tuesday. "Asset classes might change, but from a valuation perspective the scenario remains the same."

He preferred not making forecasts on a sectorial basis, given their volatility to different macro-economic scenarios, but said that stocks like the Bank of Georgia are a good opportunity. The bank is listed in the U.K. but has no exposure to the U.K. economy and is currently benefiting from a fast growing performance in the Georgian economy.

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