May 14, 2018 / 2:04 PM / 7 days ago

Morgan Stanley joins turning tide on UK equities

LONDON, May 14 (Reuters) - Morgan Stanley upgraded its view on British equities on Monday, saying the UK market should benefit from higher commodity prices and an increase in dealmaking activity despite economic uncertainty over Brexit.

The U.S. bank became the latest broker to jump on the UK equities bandwagon as strategists across several big U.S. and European banks have become convinced of the merits of holding UK stocks, after a long period of pessimism over the market.

Deutsche Bank, Credit Suisse, Citi, and UBS Wealth Management all upgraded their recommendations for UK stocks in April.

“An attractive investment case at the micro level trumps an uncertain macro and political backdrop,” said Morgan Stanley strategists in a note upgrading UK equities to “overweight”.

Higher commodity prices should help the market, which is highly weighted towards energy and mining, while an uptick in dealmaking activity - with the UK one of the busiest markets for mergers and acquisitions in 2018 so far - would also provide a boost.

“The UK market is a fertile ground for stock pickers, given a combination of low valuations and increasing corporate activity/activism,” the strategists said.

Overall, UK equities are “unloved and undervalued,” they argued.

Chronic underperformance has left UK stocks relatively cheap. The FTSE 100 is barely in positive territory, up 0.07 percent year-to-date while euro zone stocks have managed a 2.3 percent gain.

British stocks’ valuations are close to 30-year lows relative to world stocks’ average, they found.

Macroeconomic uncertainty remains the main negative to investing in UK stocks, but Morgan Stanley kept a relatively sanguine tone on the ongoing Brexit negotiations.

“We see an uncertain Brexit endgame driving a slowdown in growth, before a likely agreement on a softer version of Brexit and a modest 2019 recovery,” they said. (Reporting by Helen Reid; Editing by Julien Ponthus)

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