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Credit Suisse upgrades UK shares to 'overweight'
(WebFG News) - Strategists at Credit Suisse have upgraded their recommendation on UK shares to 'overweight', telling clients it was the second cheapest major region after Japan, with its valuation having dropped to the bottom decile of its historic range. Yet its dividend yield, relative to the market, was at 15-year highs.
The discount rate factored into UK equities versus Continental Europe was also near all-time highs, they said, with nearly all the major industrial sectors - aside from industrials - looking unusually cheap both in terms of the price-to-earnings ratios and price-to-book multiples.
Strength in Sterling on the other hand was a risk, with the strategists conceding that the house view on the pound was in fact positive.
Indeed, 73% of companies' sales came from outside the UK and nearly half of the firms' sales were reported in US dollars.
Nonetheless, they believed the currency's strength would be capped, pointing out three factors: the UK's current account deficit was at 3.6% of GDP, speculators were 'long' cable and Sterling was only "modestly" cheap in their opinion.
UK shares had also decoupled from its three main drivers, oil, Global Emerging Markets and lead indicators for activity.
Combined with their stance on Sterling, the strategists said their top-down model was pointing to 15% relative upside for UK equities.