HSBC has joined the long list of investment banks arguing that British stocks are undervalued.
The bank has raised its view of UK equities to ‘overweight,’ advising its clients to buy ahead of a turnaround.
The investment bank said the long-term selling off of UK equities by pension funds has finally ended because “they simply have no more UK equities left to sell”.
These persistent outflows from UK equities has been a source of concern for British managers.
Outflows and a lack of demand has also hit liquidity, making it harder for funds to buy and sell large positions.
As investors have sold, private equity and corporate buyers have swooped for UK stocks, which has generally been seen as a negative for the market, but HSBC pointed to them as a potential “catalyst” to push up the price of the FTSE as “total transaction values this year [are] likely to be higher than last”.
The analysts also noted the ongoing rise in commodity prices and bond yields, which, they said, “along with US dollar strength, are tailwinds for performance.”
Finally, the analysts pointed to the fact that “the combined dividend and buyback yield significantly outstrips that of other markets”.
The UK has always had a higher dividend payout than other markets. Still, the rise of share buybacks in the market is a new phenomenon.
HSBC isn’t the only investment bank to have upgraded its view of UK equities in recent months.
Last month, Swiss bank UBS shifted its UK equities rating from least to most preferred. It argued “the conditions are falling into place for the UK to turn this narrative around“, leaving room for a “consumer-led recovery amid a resilient labour market”.
“Underappreciated UK quality stocks with their high and stable returns, good free cash flow, and solid balance sheets offer attractive upside from here,” stated the bank’s economist Dean Turner.
“We think the UK offers one of the best entry points in its history,” added Goldman Sachs strategists last month. “Given its attractive valuation and strong earnings, we argue that the FTSE 250 has some space to rebound.”
HSBC also said a Labour victory in the general election would be unlikely to surprise the market, stating: “In the near term, with public sentiment so depressed, it would not take much for optimism to return in our view.”
While there is no clear data on an uptick in buying UK stocks, there have been murmurs in the industry that managers are starting to see a spike in demand for British equities.