Three reasons to expect UK stocks to underperform

Thought of the day

by Chief Investment Office 15 Jan 2018

Sterling rose to a post-Brexit high against the US dollar, extending Friday’s 1.4% gains, on the back of a Bloomberg report claiming the finance ministers of Spain and the Netherlands are considering a Brexit deal that keeps the UK as close to the EU as possible. The currency is now within touching distance of its lowest pre-Brexit level of 1.384.

But while the potential for a softer Brexit could be good news for the UK economy and stocks in the longer term, in the short term we see headwinds for UK equities:

  • In our view, UK growth will slow further to 1.1% this year (from an estimated 1.5% in 2017), and will maintain this pace next year. The uncertainties of Brexit are likely to weigh further on business investment, and we expect consumer spending to slow in light of weak real wage growth and rising borrowing costs. In contrast, we expect Eurozone growth of 1.9% this year, and for Eurozone equities to benefit from greater cyclical exposure to synchronized global growth.
  • UK equities’ forward P/E of 14.7x is in line with the long-run average, suggesting that any gains this year will need to be fueled by earnings growth, which is likely to be uninspiring. Consensus currently estimates it at 5% year on year.
  • We believe two big tailwinds for UK stocks – sterling's post-Brexit depreciation and the rise in commodity prices will – no longer be present. We anticipate broad commodity indexes delivering negative returns this year while sterling has recovered from its post-referendum lows.

The UK market returned 8% last year and we expect more muted gains this year. Within Europe, we prefer Eurozone equities to UK stocks.

Do you like this?

Please click below to sign up for more investment views.