Equity Strategy: FTSE100 remains an OW in a regional portfolio; Keep pair trade of long FTSE100 vs FTSE250

Speaker: Mislav Matejka, Head of Global Equity Strategy.

We do not believe that the positive relative case for large cap UK stocks has changed, despite what was a messy fiscal newsflow in the past few weeks. We upgraded UK to OW last November, after 6 years of our cautious stance. Even accounting for the recent elevated volatility, UK is still outperforming other key DM regions ytd, in local currency, as well as in USD terms. We believe this will continue. The UK interest rate and FX volatility is likely to abate as the government continues to adjust its course. We believe BoE intra-meeting policy moves are not needed, and look for less hikes than is currently implied in money markets. UK equities continue trading at a record discount vs other regions, currently at 8.6x forward P/E. These earnings are likely to be handicapped, but perhaps not by much, given the FX tailwind. The bulk of the FTSE100 earnings base is overseas, at 70%, and Exporters benefit significantly from currency weakness, which will act with a lag. While UK earnings have in the past downturns fallen 20-40% on average, we believe the downside is lower this time around. UK offers the highest dividend yield globally, compared to other DMs, which we believe is well covered this time. Within UK, we held an OW FTSE100 vs FTSE250 pair trade over the past year, and continue to believe this trade should be active. FTSE250 is not trading cheap vs FTSE100, despite recent underperformance, and is still sitting on near record earnings, and on dramatic past long term run. FTSE250 remains more domestically geared. Our economists project that the UK will narrowly avoid a recession, but the pressure on domestic consumption, as well as on the housing market will remain significant, given the spike in mortgage rates. We stay with the call that Exporters look better than Domestic plays. Even though Homebuilders and Retailers have already underperformed meaningfully, we would continue to avoid these, relative to the rest of the market. FX is a negative for them.

 

This podcast was recorded on 10 October 2022.

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