The UK is a buy, says Goldman Sachs

UK domestic equities are buy, Goldman Sachs said in a strategy note on Tuesday, as it pointed to a sharp economic recovery next year.

The bank said a free-trade deal and a strong economic turn should support sterling and UK domestic stocks.

"While the UK-EU trade talks have taken longer than originally planned, our economists continue to expect a ‘thin’ free trade agreement in goods," it said, adding that the EU Council meeting on 10-11 December looks like an achievable goal to see a final agreement.

In addition, Goldman said there is "substantial room" for a rebound next year as activity remains depressed - 12% below the pre-Covid level in its fourth-quarter forecast - and the UK is well placed with regard to vaccine distribution.

The bank expects widespread Covid vaccination to be underway across Europe in the first quarter of next year, with a large share of the population vaccinated by the end of the second quarter. This is a quarter earlier than it had previously expected.

Goldman’s economists expect UK growth of 7% in 2021 and 6.2% in 2022, which is significantly above consensus.

"Based on a ‘thin’ trade deal and tailwinds from cyclical optimism and vaccine distribution, our FX strategists expect GBP to maintain an upward trend," GS said.

"They continue to recommend going short EUR/GBP with a target of 0.87 (circa 3% upside versus the EUR). They also expect broad dollar weakness next year together with domestic economic improvement, driving GBP/USD to 1.44 in 12m (circa +8%)."

The bank said UK domestic stocks are the most sensitive slice of the market to sterling, along with FTSE 250, which has about 50/50 domestic and non-domestic sales. It noted that domestic stocks have re-rated but remain on a 10-15% price-to-earnings discount to the broad European market. Given the prospect of a sharp UK economic recovery next year, this offers good value, Goldman said.

"UK homebuilders and domestic banks are also sensitive FX moves and would benefit from a growth improvement next year," it added.