Equity Strategy: With Q1 still likely to be the high watermark for the market, and with UW Value next, does UK stay OW?

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

 

UK equities have performed well last year, the best DM region, outright up in local currency, and beating the US by 12% in USD terms. The question is whether one should remain positive on UK stocks this year, especially in light of potentially weaker performance of Value style from here. After being bullish Value last year, our call is that Value style will not outperform Growth this year. So far ytd, MSCI Value over Growth is at 0% in Europe and -11% in the US. While Value style tailwind might not be there anymore, and possibly even China & commodities support could peter out by mid-year, we think there are other positives for UK stocks. These are primarily defensive plays, with lower than 1 beta to global equity direction, and lower than 1 beta to global PMIs movement. If Q1 proves to be the peak of the equity market for this year, as we believe, post the strong rally from October that we enjoyed, the UK could be a relative outperformer. The UK is the highest dividend yielding of the DMs, with 4.2% yield, and fully covered this time around, with payout ratios 10-15% below typical. We think there is a good chance that in 2H US 10-year bond yields move back lower, potentially aggressively lower, with further record yield curve inversion, which could make dividend yield pickup strategy very attractive. Also, the UK market still looks exceptionally cheap, at 10x forward EPS, in contrast to US at 18x - continuing to offer record discount. FX could stay a tailwind, where UKX derives 70% of topline from abroad. We have been OW UK in a regional portfolio since Nov ’21, after 6 years of a bearish stance. The UK was our top regional pick in 2022, and we stay OW for this year, in a relative context. In particular, we think FTSE100 still looks better than S&P500. Within UK, we keep our long FTSE100 vs FTSE250 trade, which we opened in Nov ’21. Certain domestic plays have seen a good relief bounce, but in general we think that the UK consumer is likely to struggle given the delayed impact of rising interest rates. House prices are at risk of softening, housing affordability has deteriorated rapidly and consumers have likely burned through the COVID excess savings. In terms of sectoral tilts, Defensives have lagged so far ytd. UK has a greater share of these than Eurozone/US, at 40%, and has been at a disadvantage. While we have been short Staples, Real Estate, and only Neutral Healthcare, we do think that Defensives are set to start performing much better, which will then become a tailwind for the UK market.

This podcast was recorded on 12 March '23

This communication is provided for information purposes only. Institutional clients can view the related report at www.jpmm.com/research/content/GPS-4357060-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.