UK assets are world’s cheapest: Morgan Stanley strategists

SENTIMENT around the UK economy has been so poor that the nation’s stocks and credit are now the cheapest globally, which could create investment opportunities if inflation begins to slow down, said Morgan Stanley strategists. 

“Investor pessimism towards the UK is currently high; however, sentiment could shift if inflation starts to subside,” strategists led by Graham Secker said in a note. 

While UK assets have been offering relatively attractive valuations for some time, in the context of the last 20 years, UK equities and corporate bonds are the cheapest global assets, according to Morgan Stanley.

UK equities are the worst performers among major European and developed-market stocks this year as high inflation pushes the Bank of England to remain hawkish, fuelling recessionary fears. Traders have ratcheted up bets that interest rates will rise to their highest level in 25 years as they question officials’ ability to tame inflation without hobbling the UK economy. 

Morgan Stanley strategists do not expect UK large caps to outperform global peers over the next few months because of weaker earnings trends and outperformance of growth stocks. But they say that UK mid and small-cap equities look cheap and would be attractive if inflation starts subsiding and lifts economic sentiment. While risks are skewed towards more Bank of England monetary tightening beyond the 5.5 per cent terminal rate, for now Morgan Stanley strategists are not forecasting a recession. 

“The risks are rising, however, with a likely challenging autumn ahead,” they wrote. 

SEE ALSO

UK economy shrank slightly less than thought in 2020: ONS

DECODING ASIA

Navigate Asia in
a new global order

Get the insights delivered to your inbox.

Morgan Stanley’s top stock picks in the UK with the most attractive bull-bear price target skew include BAE Systems, Ashtead Group, 3i Group, BP, Smith & Nephew, Haleon, Prudential, Rio Tinto, AstraZeneca, Indivior, Segro and SSE. BLOOMBERG