Adding to the UK, reducing Japan further; Stalling bond yields confirm one needs lower portfolio beta
* UK equities are up 9% in the past six months, lagging continental Eurozone which is up 18% over the same timeframe. We think UK is becoming interesting in the regional allocation again, and move it to N, from UW:
* 1. UK is a defensive market with high dividend yield. It should perform better in the backdrop of potential softening in activity indicators, lower inflation prints and continued range-bound bond yields. Market internals have turned defensive since early May, which is a support for the UK.
* 2. We think commodity sectors will perform better from here post Q1 weakness, helping UK – consistent with the big picture of a lower USD.
* 3. GBP might not move much higher from here, which would be a tailwind for the exporters’ part of the FTSE100. FX is also a hedge on any unexpected political outcome. Labour win would be challenging for many domestic plays – screens in the report – but exporters would benefit from the potentially weaker GBP.
* 4. UK appears underowned and it is back to being record cheap on P/B relative. This holds even ex commodities.