Investment outlook: bank shares tipped as UK now favoured region
Domestic stocks underperformed for years, but a resurgence is expected to continue after the election, believes a City expert. Others share their view on the outlook for the months ahead.
2nd July 2024 15:59
by Graeme Evans from interactive investor
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Under-appreciated UK equities are in the global spotlight in the second half of 2024 as investors eye lower borrowing costs and potential upturn in economic performance.
UBS recently switched the UK from least preferred to most preferred in its global strategy, noting that a FTSE 100 price/earnings valuation still below the long-run average of 12.8 times.
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As well as relatively attractive valuations, its stance reflects an improving domestic outlook as well as the UK’s commodity exposure. It expects the Bank of England to cut rates in August, with three 25 basis point cuts in total this year set to boost the economy.
UBS’s Global Wealth Management team added today: “We hold a most-preferred view on UK equities supported by our expectation of UK economic growth to accelerate to 1.5% next year.
“Accelerating economic growth in combination with our positive view on oil and industrial metals should support a recovery of FTSE 100 earnings. After an 11% fall in corporate profits last year, we anticipate 4% growth in 2024 and 7% growth in 2025.”
Another sector to watch is UK banking, where the benefits of higher rates to profits are significantly delayed by structural hedges.
UBS reckons the rolling of these risk-management positions should add 6-7% to net interest income in 2024 and 2025, equivalent to 10% to pre-provision profit in each year.
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Barclays (LSE:BARC) is its top pick among the domestic lenders, but Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) are also ‘buy’ rated. Standard Chartered (LSE:STAN) is the leading international play.
The UK trio’s fortunes at the halfway point of the year have been given a lift by the economy being stronger than most expected at the start of 2024.
Deutsche Bank said today it expects GDP to remain robust throughout the year, underpinned by stronger household balance sheets. In particular, real disposable incomes are on course to grow by 3% this year on the back of tax cuts and slowing inflation.
While the next government will reap the benefits of an economic turnaround, the bank warns that “2024 is not 1997”.
It said: “Should Labour form the next government, there are several structural challenges that lie ahead. Indeed, potential growth is nowhere close to where it was 20 years ago. Living standards have barely improved since 2017 – with GDP per capita in the first quarter of 2024 stuck at its Q4 2017 levels.”
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In addition, public sector net debt is running closer to 100% of GDP and the UK still faces a productivity puzzle, with measured productivity lagging behind its peers.
As well as this week’s elections in the UK and France, the second half of the year also sees the potential for volatility around November’s US presidential election.
UBS said: “In equities, we think the US consumer discretionary and renewables sectors could be at risk in the scenario of a Trump victory and Republican control of Congress. We see more potential upside for financials in that scenario.
“We also think gold can act as an effective hedge against fears related to geopolitical polarisation, inflation, and excessive deficits.”
Traders expect the Federal Reserve to begin cutting US interest rates from September, with the potential for depreciation pressure on the US dollar supportive for commodities.
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UBS adds that investors will need to ensure their portfolios are “AI enabled”.
Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META) and Amazon (NASDAQ:AMZN) are estimated to make capital expenditures of around $200 billion (£170 billion) this year - a 35% increase over 2023.
“We like the semiconductor companies currently benefiting from high rates of AI investment, and the vertically integrated oligopolies in both the US and China that are well positioned across the AI value chain.”
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