LONDON JPMorgan global equity strategists said on Tuesday they expect UK stocks to claw back some of their underperformance against euro zone and global peers and recommended investors buy into bluechip, dividend-paying exporters that stand to benefit the most from a weak sterling.
A broad UK index, the FTSE 350 .FTLC is up about 6 percent this year compared to the 10 percent rise for euro zone stocks .STOXXE.
"We think UK is becoming interesting in the regional allocation again," JPMorgan's strategists, led by Mislav Matejka, said in a note to clients, adding that signs that investors have turned less risk-averse since early May also bodes well for London-listed stocks.
"(The) UK is a defensive market with high dividend yield. It should perform better in the backdrop of potential softening in activity indicators, lower inflation prints and continued range-bound bond yields," JPMorgan said.
The U.S. broker expects sterling's appreciation against the dollar to halt.
British voters go to the polls next week. While the Conservative Party, led by Prime Minister Theresa May, is expected to win comfortably on June 8, her party's lead in opinion polls has narrowed sharply in the last week, calling into question her decision to call the unscheduled election seeking a strong endorsement of her Brexit strategy.
A Labour win would be challenging for many domestic plays, JPMorgan said, adding that any sterling weakness on the back of this outcome would again boost exporters.
Elsewhere, the strategists turned more cautious on their view on the outlook for equities. They cut their rating on autos to "neutral" and added they now favor defensive sectors such as utilities and telecoms which have significantly lagged in the reflation trade underway since last summer.
Globally, JPMorgan continued to trim their allocation to Japanese equities saying a strengthening yen was a drag on corporate profits which were already showing signs of weakening momentum.
(Reporting by Vikram Subhedar, Editing by Danilo Masoni)