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Time to buy 'exceptionally cheap' London-listed shares, says JP Morgan

London Stock Exchange FTSE 100 markets share price
London Stock Exchange FTSE 100 markets share price

British stocks are undervalued and represent a golden buying opportunity despite recent market turmoil, two of Wall Street’s biggest banks have declared.

Analysts at JP Morgan said London-listed companies look “exceptionally cheap”, while their counterparts at Morgan Stanley said there is a “compelling case” for buying shares in FTSE firms.

The FTSE 100 has been comparatively resilient following a torrid start to the year for stock markets.

The blue-chip index was almost 1pc higher at 7,363 points on Tuesday and almost flat for the year to date after falling less sharply than European bourses in Monday’s sell-off.

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Graham Secker, Morgan Stanley’s chief European equity strategist, said: “Rising real yields benefit [the] FTSE 100, which is one of cheapest global indices by some distance. UK equities are also more defensive than peers, offer twice the dividend yield of global stocks and are a big beneficiary of energy strength.”

London tends to outperform during “risk-off” periods, beating European indices more than two thirds of the time during market sell-offs in the past two decades.

The FTSE’s focus on energy and mining companies will help it benefit as investors shun tech stocks and opt for more traditional companies, the analysts said.

Morgan Stanley expects Brent crude oil to hit $100 a barrel later this year, which would benefit energy giants such as Shell and BP - two of the FTSE’s biggest companies.

Its analysts named a basket of stocks they predict could rise by more than a tenth, including AstraZeneca, Diageo, Shell, RELX, London Stock Exchange Group, Lloyds Banking Group, Prudential and Vodafone.

If yields rise, the UK could outperform the rest of Europe by around 12pc, they said, pointing to London’s usually high concentration of defensive stocks such as food, healthcare, household products, pharmaceuticals and utilities.

The analysts called the UK’s undervaluation “striking” on a long-term basis, leaving it as the second-cheapest country in Europe after Spain, based on expected company performance as the pandemic wanes.

“The median stock in the UK is considerably cheaper than the median stock in other regions,” they said.

JP Morgan reiterated its upbeat view on London-listed stocks, saying: “The UK has for some time significantly lagged other markets and we note is currently trading exceptionally cheap.”

Mislav Matejka, its global equity strategy chief, said the UK offers a “good hedge” if rising rates cause further ruckus across markets.

He recommended investors favour the FTSE 100 over the mid-cap FTSE 250 because blue-chip stocks were primed to benefit from “the unwind of the surge in power prices”.

America’s biggest bank said it had a “longstanding cautious view on the UK”, but repeated a recommendation – first made last autumn – that it was time to “take advantage” of the underperformance, upgrading London-listed equities to a buy rating for the first time in nearly seven years.

The standoff between Russia and Ukraine was a potential threat to European markets, but Mr Matejka added: “We think that there will ultimately not be a full-blown conflict, but the visibility is low and the potential for a rapid escalation exists.”

The pound is not expected to strengthen in the coming months, which should provide further relief to UK multinationals. The FTSE 100 is usually boosted by falls in the value of sterling, which supports overseas earners.

The pound’s value at exchange may soften as a cost-of-living crisis begins in earnest after April’s tax hikes, but ING analyst Chris Turner says the Bank of England’s rate-hike plans should “keep the pound supported on dips”.