The decisive Conservative victory in the UK general election was taken positively by the market initially, as the likelihood for a near-term orderly Brexit has now considerably increased. In our view, the rally will most likely be short-lived as material uncertainties regarding the path towards Brexit and the economic consequences will remain in place for the foreseeable future. As a result of this, we leave our Underweight rating unchanged for the time being. UK equities have significantly underperformed the rest of the developed markets so far this year. However, valuations of the UK market are broadly in line with long-term historical averages and we see no near-term catalyst for a rerating.
The UK stock market is relatively defensive and tends to outperform when global economic indicators fall. This is mainly a result of the sector composition of the UK equity market, which is over-exposed to consumer defensives and underexposed to industrials and the fast-growing information technology sector (both relative to the US and continental Europe). We currently prefer more cyclical markets, as we see only limited upside for defensive stocks. Overall, we expect the earnings momentum in the UK to stabilize but remain weak relative to other markets. Hence, our cautious view on the UK stock market is consistent with our bullish view on cyclical. However, in the short-term, sectors that are overexposed to the UK economy like domestic retailers, homebuilders, real estate stocks and banks could outperform. Within the UK stock market, we would prefer large-cap companies, which are underexposed to the UK and overexposed to global growth, e.g. large healthcare, oil & gas and materials companies.