Credit Suisse tells investors to buy UK equities — as pound plunges and ministers resign

Credit Suisse has gone overweight on UK equities on the same day as British politics threatens to plunge Brexit negotiations into chaos.

Credit Suisse recommended buying UK stocks in a note to clients on Thursday, saying: “Nearly all UK sectors (with the exception of telecoms) appear cheap versus their global peer group.”

The FTSE 100 (^FTSE) has declined about 10% this year.

“Our FTSE 100 performance model, based on sterling, oil, lead indicators and GEM equities, points to 14% relative upside,” global equity strategist Andrew Garthwaite said in a note. He and his team upgraded UK equities to overweight. It comes as Brexit negotiations threaten to plunge the UK into political chaos.

The UK agreed a draft deal with EU on Brexit earlier this week and prime minister Theresa May declared she had cabinet support for the deal after a tense five-hour meeting on Wednesday.

However, that support has already begun to crumble. Several ministers have already resigned as of Thursday morning and there are serious doubts about the government’s ability to get the deal through parliament even if May can rally her cabinet.

These concerns have hit financial markets. The pound is down over 1% against both the dollar and the euro on Thursday morning.

Credit Suisse said: “Political uncertainty is extreme currently, but we would argue this is fully reflected in investor positioning in sterling and UK equities.

“Our view remains that a ‘hard’ Brexit (i.e. with no deal) or an early general election are unlikely. We think that the transition period will (at a later stage) be extended, in part due to the complexities of reaching a deal. The more it is extended, the closer it gets to the June 2022 election, increasing the likelihood of a potential second referendum.”

A key risk is a rally for the pound, Credit Suisse said, as 72% of FTSE 100 revenue comes from outside the UK and so a weak pound actually flatters earnings. However, the investment bank said it sees only “limited upside to sterling from here.”

Credit Suisse is not alone in being bullish on UK equities. Morgan Stanley upgraded UK equities to overweight in May.