Goldman Sachs gives 10 reasons why the UK is still a buy — despite Brexit jitters

Published Wed, Dec 2 20201:00 AM ESTUpdated Wed, Dec 2 20204:18 AM EST

Despite Britain's nervy post-Brexit trade deal negotiations with the EU, investment bank Goldman Sachs has outlined 10 reasons why the U.K. still offers opportunities for investors. The U.K. and the EU have just a few weeks left to approve a trade agreement, with Britain's transition period as it pulls out of the bloc set to expire at the end of the year. The talks have been stuck on the same three issues since the spring , and with the deadline fast approaching, there are concerns that the U.K. could leave the EU without new trading arrangements. This no-deal scenario could mean higher prices for consumers and more barriers for businesses. And the U.K.'s economy has also been severely strained by coronavirus lockdowns in the last month, as a result of a second spike in infections. Nevertheless, in a note published Tuesday, Goldman Sachs strategists and analysts the 10 reasons why they are recommending the U.K. to clients. 1. Free-trade deal — While the U.K.-EU talks have taken longer than planned, Goldman continues to expect a "thin" free-trade agreement on goods and that the EU Council meeting on Dec. 10-11 is an "achievable goal to see a final agreement." 2. Economic rebound — Goldman sees "substantial room for rebound" next year, forecasting that the U.K.'s economy will grow by 7% in 2021 and 6.2% in 2022, which is "significantly above consensus." 3. Boost to the pound — The combination of a "thin" trade deal being agreed, widespread vaccine distribution and optimism around an economic recovery, would further boost the pound, according to Goldman's foreign exchange market strategists. 4. U.K. domestic stocks — U.K. stocks which earn most or all of their money domestically and therefore in pounds would benefit from a rise in sterling, Goldman suggested. This applies to the U.K. FTSE 250 stock index, which consists of companies making half their sales domestically and half from abroad. In terms of sectors, U.K. housebuilders and banks would benefit from a potential rise in the value of the pound. 5. Discounted domestic stocks — While the price of U.K. domestic stocks has already risen, the research note pointed out that they remain at a 10%-15% discount compared with the wider European market, representing "good value" based on Britain's potentially sharp economic recovery. 6. From growth to value stocks — Goldman said commodity prices and the shift from growth into value stocks continued to drive the performance of the FTSE 100 . Its commodities team expected the price of Brent crude oil to climb to $63 a barrel in the next 12 months. 7. Cheap U.K. market — The U.K. market is on a 35% price-to-earnings discount compared with the U.S., some of which is a result of the sectors the U.K. stock market is exposed to. However, Goldman also argued this reflected "under-positioning in U.K. indices by global investors, and diminished holdings of U.K. equities by U.K. pension funds and insurance companies as they continue to switch into bonds." 8. Catalyst for catch-up in U.K. stocks — Goldman predicted that an economic recovery combined with an EU trade deal could be the catalyst for U.K. stocks to catch-up to global peers, forecasting that the FTSE 100 will reach 7,200 over the next 12 months. It closed at 6,393 points on Tuesday. 9. EU stocks exposed to the U.K. — Many of the continental European companies with exposure to the U.K. own businesses in Britain, as opposed to exporting into the country. So they would likely see a "modest tailwind" from a rise in the pound on the back of a Brexit trade deal. 10. Long-term trends — The U.K.'s working-age population growth is set to be slightly positive in the next few years, Goldman said, and then around zero after that. "In contrast, it is deeply negative in several Euro area countries; and far closer to that in Japan than we see in the U.K. or the U.S.," the note explained.

A display of U.K., Union Jack flags fly in front of The Houses of Parliament, in London, U.K., on Monday, Feb. 15, 2016.

Jason Alden | Bloomberg | Getty Images

Despite Britain's nervy post-Brexit trade deal negotiations with the EU, investment bank Goldman Sachs has outlined 10 reasons why the U.K. still offers opportunities for investors.

The U.K. and the EU have just a few weeks left to approve a trade agreement, with Britain's transition period as it pulls out of the bloc set to expire at the end of the year.

The talks have been stuck on the same three issues since the spring, and with the deadline fast approaching, there are concerns that the U.K. could leave the EU without new trading arrangements. This no-deal scenario could mean higher prices for consumers and more barriers for businesses.

And the U.K.'s economy has also been severely strained by coronavirus lockdowns in the last month, as a result of a second spike in infections.

Nevertheless, in a note published Tuesday, Goldman Sachs strategists and analysts the 10 reasons why they are recommending the U.K. to clients.