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JPMorgan says UK stocks trading at a record discount

Published 02/12/2024, 05:42 AM
Updated 02/12/2024, 05:45 AM
© Reuters.  JPMorgan's Matejka says UK stocks trading at a record discount

JPMorgan strategists said the Japanese market remains a key overweight (OW) in regional allocation, emphasizing its continued potential for investment.

The broker’s upgrade to OW status for Japan in December 2022 was based on several factors that are expected to drive growth and profitability in that market.

Notably, the Tokyo Stock Exchange (TSE) reform is anticipated to boost corporate profitability and enhance shareholder returns, particularly as a significant number of Japanese stocks are trading with net cash and below tangible book value.

Despite perceptions of Japan as a consensus OW, the strategists point out that investment flows into the country are still in the early stages, with the potential for substantial increases reminiscent of previous periods of significant stock market gains.

“Our Head of Japan Equity Strategy also remains positive on the outlook for the region, highlighting the continued progress of TSE’s market reform, potential inflow from foreign and domestic individual investors, in addition to prolonged yen depreciation,” the team wrote in a Monday note.

Turning to Europe, JPMorgan analysts’ focus is on the UK, a market that is trading at a historical discount.

After a strong performance in 2022 where it was the only large developed market (DM) to post gains, the UK faced challenges in 2023, leaving local equities at record cheap levels.

“UK is a typical low beta play, and last year equity indices were strongly up. If equity market becomes more volatile, with challenge to the Goldilocks narrative, UK could see a tailwind,” the strategists noted.

With the highest dividend yield among all markets at 4.3%, compared to the 2.0% yield for the MSCI World, the UK market could be a unique upside opportunity, especially as dividend strategies gain focus with anticipated central bank rate cuts.

Moreover, the commodity-heavy nature of the UK market, coupled with last year's underperformance in the Materials and Energy sectors, positions it for potential growth if commodity prices stabilize.

“If commodities find a floor, especially as the FCF yields of both Mining and Energy are very high at present, this could help,” they said.

In addition, the outlook for China, given its current underownership and valuation post-selloff, could indirectly influence the UK market, especially if there are short squeezes in China.

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