Goldman Sachs (GS) has become the latest investment bank to turn bullish on the UK.
In a note published on Tuesday titled “Why the UK is a buy,” analysts on Goldman’s portfolio strategy team urged clients to buy UK stocks and go long on the pound.
Analysts based the call on assumptions of a last minute, “skinny” free trade deal being struck with the EU and a strong rebound for the UK economy next year.
Goldman predicted UK GDP will bounce back by 7.1% in 2021 — much more than the 5.5% growth forecast by the UK’s Office for Budget Responsibility and above the OECD’s expectations of just 4.2% growth.
If Goldman’s sunnier forecasts come to pass, the bank thinks it will spur UK domestic stocks, such as house builders, higher and send the pound soaring. Analysts said sterling could climb as high as $1.44 next year (GBPUSD=X) — 8% above its current level.
Goldman Sachs is the latest investment bank to turn positive on the UK market, which has underperformed international peers for years. Morgan Stanley (MS) has made the UK stock markets one of its key investment calls for 2021, while Citi (C) recently urged clients to make an “aggressive” short-term bet on the British market. Experts at UBS (UBSG.SW) have also been talking up the UK.
“Overall, we position the UK as a most preferred market, and our price target for the FTSE 100 is 6,800 by June 2021,” said Caroline Simmons, UK chief investment officer at UBS Global Wealth Management, said on Tuesday.
The FTSE 100 (^FTSE) was trading at 6,386 on Tuesday, implying UBS sees a possible 6% rally over the next six months.
The MSCI UK equity market has already risen by 10% over the past month, outperforming global markets by 3%.
“The UK equity market has further to go,” Simmons said.
Bullish calls for UK stocks are largely being driven by mechanical concerns rather than fundamental optimism about the UK economy. Britain suffered one of the largest economic collapses of any developed nation in 2020 due to COVID-19. Analysts say the large fall means a large upswing is likely next year as vaccines are rolled out.
The economic collapse has hit stock prices and the larger fall means UK shares now have more headroom to bounce back than international peers, most of which fared better through the pandemic.
Analysts say a resolution to Brexit trade negotiations will also remove uncertainty. That should clear the way for more money to enter the UK, particularly through currency markets. The deadline for Brexit trade talks to conclude is 31 December, when the Brexit transition period ends.
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