Profit growth will trump politics, policy and the pound when it comes to U.K. equities, according to Citigroup Inc.
The FTSE 100 Index will rally to a record 8,000 by the middle of next year, the bank’s equity strategists forecast in a note. That implies an 8.5 percent gain from Wednesday’s close for a benchmark that is 16 percent higher than the levels seen before Britain voted to leave the European Union last June.
“Equity markets do not like uncertainty, but U.K. shares have responded well, despite ongoing domestic political uncertainty, to the reduction of global risks,” Citigroup strategists led by Jonathan Stubbs wrote on Thursday. “We remain equity bulls and see a combination of a return to profit growth in the U.K. and globally, and the closing of the equity/bond yield gap as driving further upside.”
The U.K. on Wednesday triggered the formal mechanism to exit the EU, starting the clock on two years of negotiations that threaten to be contentious. Citigroup, which expects a “hard Brexit outcome” with the U.K. leaving the region’s single market, nevertheless sees the country’s economy expanding 1.8 percent this year and 1.5 percent in 2018. The bank sees “contained” risks from politics, monetary policy and currency.
“Sterling could strengthen sharply were U.K. data to continue to perform robustly,” the strategists wrote. “For this reason, while we see international U.K. equity as better hedged against Brexit risks, it is increasingly harder to position solely on the back of a weaker sterling view.”
The FTSE 100 index of megacaps has been boosted in the past year by the post-Brexit plunge in the pound and a rally in mining companies, which drive a big chunk of the profit growth expected in the FTSE 100 by analysts this year and next. Those factors, along with a move away from global recession fears seen early last year, have contributed to U.K. equity gains, according to Citigroup strategists.
Among themes the bank sees offering the best opportunities for U.K. equity investors are stocks with depressed earnings where there are signs of improvement, companies offering a combination of value and dividend growth, and de-equitisation -- which refers to reducing net equity through corporate actions including share buybacks and dea