JPMorgan stays 'underweight' on UK before May elections
UK financial markets are not pricing in the "challenging" and "messy" nature of British politics heading into May general elections, say analysts at JPMorgan.
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“We prefer to stay ‘underweight’ (or sell) on the UK heading into this event risk, and will revisit the stance after the elections and after the initial negotiations are out of the way. We continue to find a far more interesting story in the continent, where we remain ‘overweight’ (or buy),” said JPMorgan analysts.
They said the positives are that UK relative valuations have improved substantially, with the relative price-to-book ratio now close to outright cheap territory, which is partly due to the significant 30% underperformance compared to the Eurozone since 2012.
JPMorgan’s analysts contemplate the outcomes of the elections highlighting the potential outcomes in May.
They said the most likely ones at this stage appear to be: Labour forms a minority government with Scottish National Party support and Conservatives form a minority government with Liberal Democrat support.
“Typically, the equity markets reacted more positively to the Conservative victory than to the Labour one, but this time around the prospect for an early EU referendum (in 2017) in case of Conservative victory could limit the relief rally. Consequently, it does feel that the May 7th election is almost a “no win” situation from the perspective of the financial markets,” said the analysts.
In the case of Labour victory, JPMorgan’s analysts think the sectors that will be under increasing pressure are banks, business services, diversified financials and utilities.
In the case of a Conservative victory, JPMorgan’s analysts said that the market would initially react positively, “but the key is how quickly the focus will shift onto the EU referendum, which could hurt financials in particular.”