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Morgan Stanley upgrades UK equities to ‘overweight’ despite Brexit uncertainty

Published: 07:00 14 May 2018 EDT

Brexit
Morgan Stanley expects Britain will agree a 'soft Brexit' with the EU

The UK market remains “unloved and undervalued” given the uncertainty facing the economy ahead of Britain’s withdrawal from the European Union, according to Morgan Stanley.

But Morgan Stanley upgraded UK equities to ‘overweight’ as it believes an “attractive investment case at the micro level trumps an uncertain macro and political backdrop”.

Equities should benefit from higher commodity prices and rising corporate activity with a pick-up in mergers and acquisitions and share buyback volumes at a six-year high, the broker said. 

'Best stock opportunities' in the UK

Morgan Stanley has an ‘overweight’ rating on miners Anglo American PLC (LON:AAL), BHP Billiton plc (LON:BLT) and Randgold Resources (LON:RR) as well as energy stocks Tullow Oil plc (LON:TLW) and Royal Dutch Shell PLC (LON:RDSB).

“Our positive view on commodities should help boost performance, as the UK market has over double the commodity exposure of other developed market regions,” it said.

In the property sector, the broker is bullish on housebuilders Barratt Developments PLC (LON:BDEV), Taylor Wimpey PLC (LON:TW) and shopping centre owner Hammerson PLC (LON:HMSO).

Other stocks with an ‘overweight’ rating include Playtech PLC (LON:PTEC), ITV plc (LON:ITV), Hikma Pharmaceuticals PLC (LON:HIK), Kingfisher PLC (LON:KGF), Marks & Spencer Group PLC (LON:MKS), Greene King PLC (LON:GNK), EasyJet (LON:EZY), British American Tobacco plc (LON:BATS), Smith & Nephew PLC (LON:SN), Barclays PLC (LON:BARC), HSBC Holdings PLC (LON:HSBA) and Merlin Entertainments PLC (LON:MERL).

Sell UK exporters, Morgan Stanley recommends 

Morgan Stanley noted that the UK traditionally starts to outperform late in the cycle and sees upgrades to full year earnings per share estimates on the horizon.

“We remain neutral on domestic UK exposure and recommend selling UK exporters which are the most overvalued theme in Europe,” the broker said.

“The basket has seen relative EPS downgrades in recent months and they look set to deteriorate further given the GBP strength we have seen over the last few quarters.”

Morgan Stanley predicts a 'soft Brexit'

Uncertainty surrounding Brexit negotiations will drive a slowdown in economic growth this year, Morgan Stanely said. But it expects an agreement on a "softer Brexit" and a modest recovery in 2019.

"Although macro and political uncertainty is likely to remain high in the short term, we believe there are enough other facets to the investment case to warrant a positive view
on the stock market."

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