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Dipping into UK Equities

15 October 2019EuropeEquities
  • In recent weeks, Citi analysts have shifted to a slightly more positive stance on UK equities, now favoring accumulating into weakness, particularly in UK exporters and dividend strategies. The change of stance is based on two gradual shifts that have reduced risks, but which UK equities have not yet fully discounted.
  • First, the economic risk of a "no-deal" Brexit is significant but unlikely to be devastating on a multi-year basis. Citi sees a 2.5% contraction to GDP over a two-three year period in this scenario. Second, opinion polls show slipping support for the Labour Party and its leader Jeremy Corbyn, whose probably hard-left economic policies are likely to be business-unfriendly.
  • Negotiations with the EU remain fluid however the timeline for negotiating the details of a revised EU proposal is noticeably tight. The EU summit is on 17-18 October, and that is likely to be the key date to potentially reach an agreement or otherwise. Last week, UK PM Johnson and his Irish counterpart Leo Varadkar issued a joint statement that they can "see a pathway to a possible deal" in coming weeks.
  • A "no-deal" Brexit on October 31 also looks less likely with the passing of the Benn bill, which requires PM Johnson to seek an Article 50 extension. Citi's base case see Brexit being delayed temporarily, possibly with an extension sought until January 2020 and a general election by end 2019.

    Dipping into UK Equities
    Past performance is no guarantee of future results, real results may vary.
  • Citi's investment strategy.
  • An average PE of 12.8x and dividend yield of 3.7% for UK equities look attractive, especially in an environment of historically low rates. Citi analysts prefer liquid blue chips, UK exporters and dividend plays as investors consider slowly accumulating on weakness. In particular, the attractiveness of equity dividend strategies in the region rest upon sustainable dividend payout ratios, track record of growing dividends per share, and low level of dividend cuts over the past decade.

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