Still too early to re-enter UK domestic stocks, says JPMorgan
It's still too early to re-enter domestic UK stocks such as banks, housebuilders and property and retail names, JPMorgan said on Monday, arguing that the chances of Theresa May's Brexit plan being approved by parliament "look slim".
JPM said the bounce in UK domestic stocks seen in September and October has faded, with new relative lows ahead before an eventual bottoming out.
"What comes next? The proposed deal will go to the parliament for a vote over the next 2-3 weeks, but we expect it to fail, at least the first time around. The eventual passing of the deal, probably sometime between mid-December and mid-January, will largely depend on things getting significantly worse from here in order for enough rebel MPs to fall back in line," it said.
JPM said this path is likely to flirt with any and all of the following along the way: no-deal, leadership challenge and new elections, with the material prospect of a Labour government. As any of these tail risks start to look more likely, JPM expects the UK domestic basket to sell off further.
"We acknowledge that UK domestic stocks have already suffered since the referendum, have de-rated and their earnings growth expectations for next year are not excessive. However, the downside can still be very material."
It noted that UK domestic stocks have tended to show 40-50% relative earnings per share falls in previous UK growth downturns, with valuation multiples lower than current.
"Given this, we would look to buy the domestic stocks once the deal starts to appear secured, but not before."
For now, JPM remains 'overweight' UK exporters versus domestic stocks, and FTSE 100 versus FTSE 250.