Goldman bullish on UK domestic stocks
UK stocks that are exposed to the domestic market are set to rally next year as easing Brexit uncertainty and a jolt of government spending reinvigorate the sluggish economy, Goldman Sachs has forecast.
The investment bank told its clients late on Monday its analysts expect a rise in the price of domestic-focused stocks next year. The assets had taken a serious blow following the 2016 Brexit referendum, leaving them trading at a 20 per cent discount in valuation to their international peers (see chart below).
Domestic companies have suffered from the UK’s weak economic performance, with expectations for earnings per share declining more sharply than other parts of the UK market, Peter Oppenheimer, Goldman’s top equities analyst, said.
Mr Oppenheimer said a turnround in UK growth will be the “key” for UK domestic stocks. Goldman’s economists are hopeful that the economy will accelerate, with gross domestic product expanding at an annualised rate of 2.4 per cent in the second half of next year, double the pace recorded in the third quarter of this year.
Goldman’s economists expect two main factors to provide a tailwind to the economy:
1 – “A resolution to Brexit-induced uncertainty is likely”.
Clarity on the UK’s terms of exit should emerge faster under a Conservative government than a Labour government, although a Labour administration would introduce a plausible path to ‘Remain’.
2 – “A sizeable fiscal impulse is on the horizon”.
Both parties plan to increase government spending substantially, with Labour proposing a larger increase in public-sector investment than that envisaged by the incumbent Conservative administration.
For more on the second point, make sure to read Chris Giles’ analysis, published earlier today, of the main parties’ spending pledges.