Morgan Stanley sees brighter outlook for sterling, UK midcaps
[LONDON] A bullish view on sterling spurred Morgan Stanley strategists to upgrade their view on UK midcap companies on Tuesday.
A stronger sterling is usually accompanied by underperformance of large-cap UK equities relative to other regions, the broker warned, adding they recommended investors look for exporter shares to sell.
Foreign exchange is having the greatest influence on UK stocks in 20 years, Morgan Stanley said, leaving the latter susceptible to currency swings.
Since the Brexit vote last June, the performance of the FTSE 100 is has highly correlated, inversely, with the sterling's move against the US dollar, as index constituents which derive significant chunks of their revenue offshore saw sharp earnings upgrades.
At the same time, shares of domestic UK companies, whose earnings are in sterling but costs can be offshore, suffered in relative terms.
Morgan Stanley now sees a high probability that this reverses. The firm's FX strategists expect the sterling to rise to US$1.28 by the end of this year, and US$1.45 by the end of 2018.
Those forecasts prompted the firm to upgrade midcaps to "neutral" from "underweight", and to downgrade their "overweight" stance on UK large-caps to "neutral".
Sectorally, financials and real estate stand to gain most from a stronger currency, the bank said, as their relative performance was most correlated to the exchange rate.
Overweight-rated stocks in the bank's domestic UK basket include AA, Autotrader, Lloyds, Marks & Spencer and Whitbread.
REUTERS
BT is now on Telegram!
For daily updates on weekdays and specially selected content for the weekend. Subscribe to t.me/BizTimes
Banking & Finance
Great Eastern chairman appeals for patience as shareholders fume over share price ‘disaster’
S&P Global first-quarter profit beats estimates on strong product demand
Thai banks cut rate for some borrowers after push from PM
Money laundering accused who faces 22 charges to plead guilty on May 14
BNP Paribas beats estimates as lower costs offset trading slump
Japan brokerage Daiwa’s Q4 profit more than doubles as markets recover