Morgan Stanley, Barclays say UK stocks are looking cheap and can weather risk-off period

Published Wed, Jan 26 202211:02 PM EST

Morgan Stanley and Barclays have this week backed U.K. stocks to perform relatively strongly through the current period of monetary policy-induced global market uncertainty. Markets have swung wildly in recent sessions amid a broad pullback for risk assets since the turn of the year, particularly in high growth stocks likely to be negatively affected by rising interest rates. The S & P 500 closed Tuesday's trading day down 8.6% on the year, while the pan-European Stoxx 600 was down by around 4% and the MSCI Asia ex-Japan was down around 2.8% year-to-date on Wednesday. However, Britain's FTSE 100 had eked out gains of around 1.5% year-to-date by Wednesday afternoon, and strategists at both major banks see a compelling case for U.K. stocks. In a note Monday, Morgan Stanley Chief European Equity Strategist Graham Secker highlighted that rising real yields will benefit the FTSE 100, which he noted is "one of the cheapest global indices by some distance." Real yields have been adjusted to remove the effects of inflation. Morgan Stanley estimates that an upward move in U.S. real yields to the bank's bond strategists' target of -0.1% would indicate around a 12% outperformance of the MSCI U.K. large and mid-cap index compared to MSCI Europe ex-U.K. Meanwhile at 12.6x forward earnings — a measure of current share valuations relative to companies' estimated future earnings-per-share — the FTSE 100 is the cheapest major index against its own 10-year history, Secker highlighted. "U.K. equities are also more defensive than peers, offer twice the dividend yield of global stocks and are a big beneficiary of Energy strength," Secker added, noting that the MSCI U.K.'s 3.6% dividend yield is currently twice as high as that on the MSCI World. The FTSE 100 is heavily weighted toward energy and financials, with the energy sector accounting for around a quarter of U.K. profits, so rising oil prices are also likely to boost the index. Meanwhile, consensus earnings-per-share expectations for U.K. stocks are "very low" at sub-3% for 2022 and 2023, Secker contended, offering space for upside earnings surprises. 'Under-owned' and less vulnerable The comparatively low valuations of U.K. equities have also been identified as an opportunity by Barclays, with Head of European Equity Emmanuel Cau noting that along with being "under-owned," they are also less vulnerable to a reversal of central bank liquidity than other regions. In a research note Friday, Cau introduced seven overweight-rated stocks which have an average implied upside to Barclays' price target of 35%. These were Centrica , IG Group , Hargreaves Lansdown , BT Group , Legal & General , Lloyds and British American Tobacco . Barclays cited the potential for an upside surprise in online trading firm IG Group's first-half numbers, due Thursday, as a potential catalyst, and also expects the conclusions of a capital structure review to be announced. "With few obvious capital requirements to grow the business, and given the depressed valuation (FY22 PE of 11.4x, dividend yield of 5.4%), a return of cash to shareholders via a share buyback could clearly be a compelling and low-risk use of at least some of these proceeds," Cau explained. He also projected earnings-per-share upgrades at financial services company Hargreaves Lansdown to accompany the base U.K. rate rise forecast. Hargreaves Lansdown reports first-half results and holds its first ever Capital Markets Day on Feb. 22, which Cau suggested could see the high number of short positions against the stock unwind. Cau expects a strategic update to accompany Lloyds' full-year report on Feb. 24, which he anticipates will feature "a step up in costs, but with downside risks limited by rising market expectations."

Signage is displayed outside Morgan Stanley & Co. headquarters in the Times Square neighborhood of New York.

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Morgan Stanley and Barclays have this week backed U.K. stocks to perform relatively strongly through the current period of monetary policy-induced global market uncertainty.