JPMorgan ups UK equities to 'neutral', says risk/reward improving

JPMorgan Cazenove upgraded its stance on UK equities to ‘neutral’ from ‘underweight’ on Monday, highlighting an improvement in risk/reward and funding the move by downgrading Japan equities.

The UK is by far the worst performing equity region year-to-date, it said, down 21% in US dollar terms, underperforming the eurozone by 13% and the US by 20%.

JPM said the UK has now lagged global peers in each of the last five years "and this is not just due to the strong US run". It lagged the rest of Europe by a cumulative 25% over that timeframe.

"We held a long-standing cautious UK stance, which appeared particularly non-consensus last year heading into the elections, and we stayed bearish on UK post elections, despite what appeared to be a market-friendly election outcome," it said. "We now believe that the relative risk-reward for UK is finally starting to improve, and are closing our ‘underweight'."

JPM said the UK is trading cheap on most metrics, even if you take out energy and banks. It also noted the UK typically performs better when bond yields are subdued, but said a significant gap has opened up. "We expect bond yields to stay constrained, so the gap could close through stocks," it said.

"Dividends have been cut significantly year-to-date, which disproportionately hurts the UK, but now that almost 40% of European corporates have made dividend cuts this year, we think that we are past the worst."

In terms of what to buy, JPM said it is still positive on domestic plays, which it upgraded in November of last year ahead of the elections, homebuilders in particular and utilities.

"In addition to domestic plays, if GBP is weaker, exporters could also do better," it said, adding that it remains ‘overweight’ on mining and is positive on pharma, staples and tech names.

"We continue to be less comfortable with banks and energy, but note both of these sectors had a terrible run already."