LONDON — British stocks remain attractive and will continue to rise as 2017 draws to a close, regardless of Brexit worries, according to equity analysts at Deutsche Bank.
In the note, Deutsche analysts Wolf von Rotberg, Sebastian Raedler, Thomas Pearce, and Andreas Bruckner said they are overweight British stocks — essentially meaning they believe UK markets are good value for money — and that they see the benchmark index, the FTSE 100 rising further in 2017.
In December last year and January this, the FTSE 100 went on a streak of more than 10 days of consecutive new highs, surging as the pound weakened, triggered by Britain’s vote to leave the European Union. It has held onto those highs for most of the year, and is currently trading at around 7,350 points, roughly 200 points or 2.6% below its record.
More upside remains for the FTSE 100 this year, von Rotberg and team argue, thanks to the continued weakness of the pound, as well as fading momentum in the eurozone and strength in the energy sector.
Here are the bank’s four key ideas:
- “UK equities have underperformed the market by 3% since the beginning of the year. Yet, the UK remains our largest overweight, given that: a) it tends to outperform in periods of fading Euro area PMI momentum — and we expect PMI momentum to turn negative over the coming months;
- “b) our FX strategists project moderate downside for the GBP trade-weighted index by year-end, which tends to benefit the UK’s relative performance;
- “c) its relative performance moves in line with that of the energy sector, one of our sector overweights;
- “d) the UK ranks as the cheapest market on our European valuation scorecard.”
And here is the bank’s chart:
The basic premise of Deutsche’s argument is that when the pound falls, that makes exports from Britain more attractive to foreign buyers. The FTSE is heavily reliant on companies which exporting goods for much of their business, and as a result, the falling pound is likely to keep supporting stock prices.
Though a weaker pound might seem like bad news for UK stocks, about 70% of the revenue of the companies that make up the FTSE 100 is derived from abroad, meaning they make more money when sterling is weak. The index is full of mining companies, oil firms, and pharmaceutical giants that use the UK as a base but tend to denominate their assets in dollars.
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