Morgan Stanley sees pound as 'cheap', upgrades UK midcaps
Morgan Stanley said the pound looked increasingly "cheap" in a historical context and suggested several ways for investors to play off this idea, including a selection of London-listed stocks.
Aviva
457.20p
17:15 18/04/24
B&M European Value Retail S.A. (DI)
520.00p
17:05 18/04/24
Banks
3,882.59
17:14 18/04/24
FTSE 100
7,877.05
17:14 18/04/24
FTSE 250
19,450.67
17:14 18/04/24
FTSE 350
4,334.00
17:14 18/04/24
FTSE All-Share
4,290.02
16:54 18/04/24
GBP/EUR
€1.1677
03:58 19/04/24
GBP/USD
$1.2402
03:58 19/04/24
General Retailers
3,805.00
17:14 18/04/24
Life Insurance
5,738.19
17:14 18/04/24
Lloyds Banking Group
51.00p
16:35 18/04/24
Prudential
722.80p
16:56 18/04/24
St James's Place
417.60p
16:40 18/04/24
Support Services
10,449.40
17:14 18/04/24
The investment bank's strategists have set a sterling target for year-end 2017 closing level versus the US dollar of 1.28 and of 1.45 for 2018.
Nevertheless, their preferred manner for taking advantage of the coming bounce was through the pound's cross against the European single currency.
They recommended clients go 'short' euro/GBP, saying they expected the pound to re-rate 12% higher by the end of the year.
As of 1037 GMT cable - as traders call the currency cross between Sterling and the Greenback - was off by 0.35% to 1.2235, having hit an intrady low of 1.2192.
That was below the end-2016 closing mark of 1.2266 albeit still higher than the year-to-date lows of 1.20443 reached on 16 January.
Exchange rates are famously difficult to forecast, especially over the shortest time horizons, but over the medium-term they were often well correlated with relative interest rates and rates of economic growth between different countries, some studies found.
While only a rough guide, some economists in the market, such as those at Barclays, are forecasting overnight rates in the US to rise to between 2.0% and 2.25% by end-2018, whereas the UK's Bank Rate was seen flat at 0.25% over that same time-frame (alongside fiscal stimulus from the new administration).
That, perhaps, explained the drop in the pound in recent weeks, on top of Sterling's already sharp drop in the run-up and immediate aftermath of Brexit.
Growth of 2.1% in the States in 2017, and accelerating, also made for a difficult comparison with the UK, where GDP was seen expanding by 1.5% in 2017 - slowing to 1.8% in the following year.
The latter was even lower than the 1.6% forecast for the euro area in that year but then of course, if the UK had Brexit to contend with, then the Eurozone was heading into the teeth of multiple elections in 2017 as the financial crisis in Athens continued on its slow boil.
Regarding the potential impact that stronger Sterling might have on UK stocks, Morgan Stanley said it undermined the 'sell' case for mid-caps.
They therefore moved back to 'neutral' between the FTSE 100 and FTSE 250, versus 'Underweight' the latter.
A stronger pound would hurt UK exporters, whose relative valuations were at nine-year highs, the broker added.
Financials and real estate tended to do best when the pound gained against the euro, Morgan Stanley said; specifically, the stocks that looked likely to benefit the most were Lloyds, Aviva, Prudential, B&M European and St James's Place.
Capital Economics on the other side of the trade (but not on Euro/GBP)
On a more cautious note, Jonathan Loynes, chief economist at Capital Economics added: Of course, the pound could yet fall further. Indeed, the previous relationship with expected interest rates suggests that it might fall to $1.10 or below. However, if we are right in expecting the economy to remain resilient, interest rate expectations could soon rise again.
"[...] Accordingly, we are sticking to our forecast that the pound will end the year just a touch weaker against the US dollar at around $1.20 and rise against the euro as slowing growth and political pressures in Europe weaken the single currency.
"But even it falls further, it should be clear by now that the economic consequences of a lower pound are more positive than many people had assumed."