JPMorgan Says U.K. Equities Flash Buy Despite Brexit Risks

Updated on
  • PMI figures point to ‘good growth’ from U.K. economy: Illsley
  • FTSE 100 is ‘attractive’ on a cyclically-adjusted P/E basis

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Investors hung up on Brexit may be missing out on a buying opportunity in the stock market.

So says JPMorgan Asset Management, pointing out that the FTSE 100 Index looks attractive when its price-earnings ratio is adjusted for inflation over the past 10 years. With that multiple well below its long-term average and the global economy set to expand, U.K. equities offer “good value,” said James Illsley, who oversees about 900 million pounds ($1.2 billion) of British stocks at the asset manager.

“We don’t want to get fixated on Brexit -- we want to think about the bigger picture,” Illsley said by phone from London. “The global economy continues to grow, and while there might have been a slowdown in the pace of growth in the U.K., its economy is still growing.”

Output in the U.K. continued to expand in May, with the composite purchasing managers’ index at 54.4, a number that points to “good growth,” according to Illsley. The country’s economy is set to grow in 2017 at a slightly slower pace than last year.

Adjusted for inflation, the FTSE 100 traded at 14.9 times earnings at the end of May, compared with a long-term average of 16.9 times since the 1980s, JPMorgan Asset said. The gauge, whose members get about three-fourths of their sales from abroad, is up 3.1 percent this year in pounds, supported by a weakness in the currency and robust profit expectations for 2017. That’s still only about half the gain of the Stoxx Europe 600 Index.

Illsley said he is finding opportunities in more domestic areas of the market as well, which some investors have been avoiding because of mounting concerns about the U.K. economy.

A year after the secession vote, pressure on the economy is increasing, with the fastest inflation rate in more than three years curbing consumer spending and house prices for the three months through May growing at the slowest annual pace in four years.

“Some people are concerned there will be a squeeze on real income growth this year for the U.K. consumer -- I’d agree with that,” Illsley said. “It’s going to be a temporary effect. Next year, we will see real wage growth start to reemerge.”

The fund manager is positive on U.K. homebuilders like Redrow Plc, Bellway Plc, Persimmon Plc and Taylor Wimpey Plc, saying that the undersupply of new-build housing in the U.K. and government initiatives like “Help to Buy” will support the sector. He also likes JD Sports Fashion Plc, in part for its appeal to a younger demographic, and WH Smith Plc, for its exposure to the travel industry.

(Updates FTSE 100 move in 5th paragraph.)
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