Bank of America bullish on Britain – Sees UK stocks up 30 per cent by end of 2015
A note published today shows Bank of America Merrill Lynch is bullish on the UK's prospects. Their comments below.
John Bilton, European investment strategist:
After 5y of slow growth the UK recovery is picking up pace
The UK economy shrank 7% peak to trough in 2008/9; and in the last 4y grew at just 1% per year. But now consumer confidence, PMIs, and credit conditions are improving and we see the UK economy growing by 2.2% in 2014. The squeeze on household income remains a headwind; but with the Eurozone also emerging from recession and home prices rising, the UK recovery is gaining momentum.But BoE policy likely stays loose, giving a boost to UK assets
While the economy is gathering pace, monetary policy will likely remain loose. Base rates are now linked to unemployment being <7% and the BoE does not expect to raise rates until 2016. With global bond yields beginning to rise, this implies a steep gilt yield curve and loose monetary conditions through 2014/15; in turn giving a supportive backdrop for risky assets.Our CROCE-WACC1 model has UK stocks up 30% by end-2015
The $3.3Trn UK stock market is 30.9% of pan-EU market cap and 137% of UK GDP. We studied 174 non-bank UK firms over ca. 10y and find that 74% of the variance in EV/Capital Employed is explained by creation or erosion of economic value using a CROCE-WACC1 model. Applying the analysis to 2013-15 forecasts, we estimate UK equity market cap could rise by ca. 30% by 2015. We maintain our FTSE target of 7,100 for mid-2014, and introduce a target of 7,400 for FY14.FTSE isn’t a proxy for ‘UK plc’ and may lag other EU indices
Stocks should do well as the recovery plays out, but the UK market is dominated by global mega-caps with a ‘quality’ and ‘defensive’ tilt. The FTSE-100 has only a 0.92 beta to MSCI World so likely lags higher beta EU indices as growth returns. The broader FTSE-350 sectors are more representative of the underlying UK economy, while among large caps the banks are the best proxy for ‘UK plc’Banks, Retail & Real Estate the best plays for a UK recovery
Our CROCE-WACC model points to a barbell of OW financials, consumer and services firms vs. UW staples and expensive global cycle plays. In our view, this optimises exposure to a domestic recovery within UK equities. To play the global cycle, UK energy and travel & leisure sectors offer greatest potential upside.Overweight: Banks, Real Estate, Energy, Retail, Telcos, Travel, & Business Svcs
Underweight: Food/Beverages/Tobacco, Industrials & Chemicals