Credit Suisse advised investors to take a “tactical pause” in U.K. stocks before the December 12th general election.
In a strategy note, the brokerage flagged a number of short-term risks. It said domestic U.K. stocks are “significantly overbought,” said election uncertainty may cause the market to worry, and said the future trading arrangement between the U.K. and Europe may, if along the lines of a pact reached with Canada, “have almost the same economic impact as a no deal Brexit.”
But it said over 6 to 12 months, there’s opportunity. The bank says there’s a 65% chance of a Conservative government, and notes the average swing in the 6 weeks prior to an election typically — though not in 2017 — is limited to about 6 percentage points.
The Brexit transitional period is likely to be extended significantly beyond December 2020 and it expects a trade deal will go beyond the so-called Canada-plus model. Valuations of U.K. equities remain at a 20-year low, risk appetite remains depressed in the U.K. and fiscal easing will support U.K. growth, the broker said.
Credit Suisse says it prefers cheap international stocks like Diageo DGE, -0.39% , Johnson Matthey JMAT, -0.65% , Relx REL, -0.32% , Informa INF, -0.13% , ABF ABF, -0.67% and Imperial Brands IMB, -0.93% , and among domestic stocks, it highlighted utilities United Utilities UU, +1.16% and National Grid NG, +0.11% , and said banks Barclays BARC, -0.69% and Lloyds look cheap relative to peers.
It downgraded U.K. retailers to underweight from benchmark and said Marks & Spencer MKS, +1.05% is an underperform. It’s also underweight the London-related householders and office REITs.
The U.K. FTSE 100 UKX, -1.09% on Thursday slumped 1% to 7257.45.
Royal Dutch Shell RDSA, -3.80% RDSB, -4.05% exerted a big downward pull, as the oil giant dropped 3.9% as it reported a 15% drop in third-quarter profit and said its $25 billion stock buyback plan is uncertain because of “the prevailing weak macroeconomic conditions and challenging outlook.”
Lloyds Banking Group LLOY, -1.77% fell 1.7% as the U.K. bank was the latest to report a charge for misselling payment protection insurance, booking a 1.8 billion pound charge.