In a world where investors are betting on stocks tied to economic growth, the U.K. equity market is not the place to be.
According to RBC Wealth Management, British stocks will miss out as traders push equities higher on bets of faster global growth and inflation. That’s because roughly a third of the main British equity gauges are made up of defensive names in the healthcare, consumer goods, utilities and telecommunications sectors that traders tend to perceive as safer investments and scoop up in times of economic turmoil.
Despite global stocks reaching new peaks in recent weeks, firms from JPMorgan Chase & Co. to Natixis SA have recommended that investors stick to the so-called reflation trade, as macroeconomic data will continue to support the stock market. RBC Wealth agrees, noting that the U.K won’t benefit from the trend as much as continental Europe and the U.S. The firm, which oversees roughly $430 billion globally, has an underweight rating on U.K. shares.
“If you are focusing on global growth, you wouldn’t want exposure to a market that’s largely defensive,” Frédérique Carrier, a managing director and head of investment strategy at the firm, said in an interview in London. “We see better opportunities elsewhere, and prefer to be in regions that are more cyclical.”
Members of the FTSE 100 Index, Britain’s megacap benchmark, get roughly three-quarters of their sales from overseas, and their midcap peers get about half. While the weakness in the pound in the aftermath of the Brexit vote has boosted the profits of U.K. exporters, that’s not enough to make Carrier optimistic on the shares. She notes that domestically exposed companies still make up a significant chunk of the market — and they are in for a bumpy ride this year.
Signs of a slowdown in the U.K. economy have started to emerge, as surveys show a loss of momentum in services, the main driver of better-than-expected growth since the Brexit vote in June. The construction industry also showed signs of weakness in February, with a gauge of demand dropping for a second month. Chancellor of the Exchequer Philip Hammond said on Wednesday the U.K. economy will grow faster than previously forecast in 2017, though less quickly over the next three years.
“We expect domestic U.K. revenues to suffer from a squeeze in households’ disposable income and a weaker economy,” Carrier said. “That’s going to cap the upside.”
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