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UK stocks tipped for big things in 2020

·Senior City Correspondent, Yahoo Finance UK
FRANKFURT AM MAIN, GERMANY - JUNE 24: A TV reporter pose with a Great Britain flag at the Frankfurt Stock exchange the day after a majority of the British population voted for leaving the European Union on June 24, 2016 in Frankfurt am Main, Germany. Many prominent corporate CEOs and leading economists have warned that a Brexit would have strongly negative consequences for the British economy and repercussions across Europe as well. (Photo by Thomas Lohnes/Getty Images)
After years of Brexit-driven underperformance, fund managers and analysts think UK equities could be set for big things in 2020. Photo: Thomas Lohnes/Getty Images

Forget BritBox — 2020 could be the year of Brit stocks.

After years of Brexit-driven underperformance, fund managers and analysts think UK equities could be set for big things this year.

Morgan Stanley named the UK “the standout equity opportunity for 2020” and a third of money managers surveyed by the Association of Investment Companies (AIC) think the UK will produce the best stock market returns globally in 2020.

Retail investors are excited too — 43% of customers surveyed by investment platform Interactive Investor said the UK was their top location for investment in 2020. 19% think the FTSE 100 will end the year at new record highs.

Why are so many so optimistic? A big factor is the UK stock market’s recent under-performance.

International investors ditched British stocks en masse in the wake of the 2016 Brexit referendum and the political instability since has left most unwilling to return.

“Since the EU referendum result, the UK equity market has been an easy one to ignore,” said Laura Foll, co-manager of Lowland Investment Company and the Henderson Opportunities Trust.

UK stocks are undervalued as a result. The MSCI UK index of stocks currently trades at a 36% discount to the MSCI World index, according to Morgan Stanley. Mark Barnett, head of UK Equities at Invesco, said £1 of revenues sourced in the UK was worth less than a third of $1 of revenues sourced in the US as of November this year.

“The UK is one of the most unloved and undervalued major stock markets in the world,” Morgan Stanley analysts concluded.

READ MORE: The UK stocks that defined 2019: Lloyds, BT, Tesco, and more

That could be about to change, following the thumping victory for the Conservative party in December’s general election. Prime minister Boris Johnson is now on track to take the UK out of the EU at the end of January and progress to trade talks. It brings some welcome clarity to the process.

“Talk of a ‘wall of money’ waiting to invest in British business is not just wishful thinking,” said Lee Wild, head of equity strategy at Interactive Investor.

“UK domestic stocks have already surged in value following the General Election result, but institutional cash and international investment will arrive in the months ahead.”

Analysts at Barclays wrote in a recent note: “Many investors we met have materially reduced exposure to the UK over the last few years, due the fears of a disorderly Brexit and radical Labour party policies.

“With these two tail-risks having now mostly reduced, global investors see UK equities becoming ‘investable’ again.”

As investors put cash into UK stocks, the laws of supply and demand say prices should rise.

“The UK equity markets are set to benefit from the overwhelming Conservative victory on 12th December,” analysts at Jefferies wrote in a recent note.

Foll said she expects the recent uptick in UK M&A to continue into 2020, which should also boost returns.

One potential hiccup is sluggish UK economic growth. But even here there is some optimism.

“The foundations for growth in the economy are already there,” Invesco’s Barnett said. “Despite the political induced uncertainties, there is record employment in the UK, that has been achieved alongside real wage growth, and household economies may now feel liberated.

“The new Government is also committed to increasing the fiscal stimulus. Taken together, we continue to be more optimistic for the real economy in the UK and the prospects for real value creation, than many others might have been.”

Barnett believes domestic UK stocks “offer the greatest risk adjusted opportunity to investors.”

READ MORE: Brexit, US elections, and trade war leave investors glued to politics in 2020