A post-Brexit trade deal thrashed out by the UK and the EU in the final days of 2020 has provided analysts at UBS with “more confidence” in their bullish outlook for UK equities over the coming year.
In a note last week, the investment bank said it is now forecasting a FTSE 100 reading of 7,200 at the end of 2021, an 11% increase on its closing level of 6,471 on December 31, 2020, adding that it expects UK relative valuations to recover from their 20-year lows.
UBS also said they expected “a large proportion” of the return for international investors will come from a strengthening pound, which it forecasts to reach a value of US$1.44 against the dollar by the end of the current year.
“Within the market there has been a strong correlation between the move in GBP/USD and the performance of domestic stocks relative to international. It has also been a key driver of relative earnings momentum. From here, we expect Sterling to strengthen to [US$1.44] and would favour domestic exposure”, UBS said.
Meanwhile, the bank highlighted that “domestic cyclicals” stocks such as housebuilders and retailers, which derive a large portion of their revenues from the UK market, are “most positively correlated to an improvement in Brexit sentiment”, while sectors with large international exposure such as beverages, household products, telecoms, energy and pharmaceuticals, are likely to be “most insulated from negative Brexit sentiment”.
Meanwhile, in a note on December 24, analysts at Liberum said the trade deal has avoided the “worst possible outcome of a hard Brexit” and as a result, they estimated sterling had “11.5% upside” against the dollar and 13.8% against the Euro.
“This will boost domestic earners vs. international earners. We estimate that on average this event will be neutral for the FTSE 100, but provides 7% to 10% upside for the FTSE 250”, the broker said.
“While this trade deal is far from perfect and years of negotiations on other subjects are ahead of us, this is clearly a positive outcome for the UK economy and UK businesses. Given that the perception of the EU by British citizens is currently the most favourable in at least 16 years according to an annual survey of Pew Research Center, this should clearly improve both business and consumer sentiment and on the margin support investments and retail sales. In a time when the UK economy is recovering from the worst economic decline in more than 300 years, this is welcome news and underpins our overall bullish stance for stock markets”, Liberum added.