Credit Suisse upgrades UK equities, says early elections 'unlikely'

Credit Suisse upgraded its view on UK stocks on Wednesday, arguing that investors had 'thrown in the towel', leaving shares undervalued in the process.

More specifically, according to the Swiss broker's FTSE 100 performance model, based on the level of Sterling, oil, lead indicators and Emerging Market equities, the top flight index was 1.4 standard deviations "cheap", with 14% relative upside to be had.

The Swiss broker's Global Equity Strategy team, led by Andrew Garthwaite, also believed that investors had already positioned themselves for political uncertainty, which admittedly was now "at extreme levels", which had seen a "capitulation" in fund flows.

Indeed, they judged a 'hard' Brexit or early general elections to be "unlikely", anticipating instead that the transition period would eventually be extended, partly due to the "complexities" of agreeing a deal with Brussels.

But the more it was extended, then the closer that would bring things to the June 2022 election, in turn "increasing the likelihood of a potential second referendum".

Sterling was a risk, they admitted, but Credit Suisse saw only "limited upside", pointing to Britain's current account deficit, which was running at roughly 4% of the country's gross domestic product.

As well, they foresaw a "long, uncertain" negotiation process.

And while a hypothetical Labour government led by Jeremy Corbyn would be negative for UK equities, typically 42 months put from an elections, as at present, the incumbent party's popularity only fell by one percentage point "suggesting a minority Conervative government could persist".

Among the companies that Credit Suisse said looked "inexpensive" relative to their global peers, were: Whitbread, Thomas Cook, Diageo, BAT, RDS, Rio Tinto and Prudential, all of which the investment bank had at 'outperform', while a quantitative screen would add the likes of Imperial, BP, easyJet, Ashtead, Lloyds, Schroders, BP and Informa.

"Of the domestic sectors, banks and real estate have the closest correlation with sterling. In this context we find Lloyds attractive, but not REITs."