Buy UK shares, says Goldman Sachs.
It is the latest investment bank to become bullish on the UK. On Tuesday, Goldman’s portfolio strategy team published a note titled “Why the UK is a buy”, advising their clients to buy the UK stock market.
Although Brexit negotiations are taking longer than anticipated, analysts at Goldmans believe that a last minute deal will be struck with the European Union. The bank also believes that the UK will experience a sharp economic recovery in 2021. This, in turn, should support UK domestic stocks.
Bullish on UK shares
I do not think it surprising to see Goldmans turn bullish on UK stocks. UK shares are looking cheap these days. At time of writing, the FTSE 100 and FTSE 250 indexes have fallen by 15% and 10% in 2020, respectively.
Many of the blue-chip companies that make up the FTSE 100 derive their earnings overseas. As a result, sterling impacts the performance of this index. The FTSE 250 offers a more UK-centric performance, as most companies derive their revenue domestically.
Recovery in 2021
Goldmans believes that the UK is well placed with regard to the Covid-19 vaccine distribution. The bank expects widespread distribution of the vaccine across Europe in the first quarter of 2021. This would result in a large portion of the population being vaccinated by the end of June.
Goldman’s economists expect UK growth of 7% in 2021 and 6% in 2022. This is significantly above the consensus view. While I believe UK shares are cheap, I am not as optimistic as Goldmans. I think UK shares are still likely to be volatile as the economy recovers from the global pandemic.
Other banks
Goldman Sachs follows other banks who have recently turned positive on the UK market. Morgan Stanley has made the UK stock market its key investment call for 2021.
Citi recently told its investors to consider making a short-term “aggressive” bet on UK shares. UBS has a price target of 6,800 for the FTSE 100 by June 2021. Its analysts consider the UK as its most preferred stock market.
My view
While I could add the iShares Core FTSE 100 and iShares FTSE 250 ETFs to my portfolio, I think it is too early to be buying UK shares.
Covid-19 has hit the UK stock market hard. The large fall means that UK shares have more headroom to recover that other international stock markets such as the US, which have fared better through the pandemic.
Although the UK stock market has recovered from its lows in March, I believe there is still a large amount of uncertainty. Vaccines are likely to be rolled out next year but given the UK government’s past performance I don’t think this will be a smooth distribution. A Brexit trade deal has still not been agreed, which makes me nervous. On this basis, I expect the UK stock market to fall from its current levels and I will be buying on the dips.
