The FTSE 100 is a potential counterintuitive bet for JP Morgan Cazenove as the index as the US dollar appears to bottom out and dividend cancellations seem to have stabilised.
Londons blue chip equity index is “looking more and more interesting”, equity strategists at the investment bank reckon, after five years in the dog house.
“This might appear counterintuitive given the Brexit uncertainty and the likely continued labour market and activity weakness,” they said in a note on Monday.
However, the pound and bond yields are actually still the “key drivers” of the Footsie, with the strategists noting that FTSE 100 valuations are at “record cheap levels”.
As most followers of the UK's blue chip benchmark know, it has a strongly inverse correlation to sterling, especially its relationship with the dollar.
“If GBP is softer due to Brexit risk, FTSE 100 will likely hold up better,” the strategists said.
“Also, UK equities are a big dividend play and outperform when bond yields are lower. We think the peak of dividend cancellations is behind us, and the weakening UK labour market is likely to keep bond yields subdued.”
The prediction is the FTSE 100 will outperform the FTSE 250 on the weaker pound and subdued UK activity, which will hit the mid-cap index more.
Long positions, buys in other words, were also suggested in pharma, consumer staples, tech, mining, utilities, while keeping a bearish stance on energy and banks.
There are also implications of the US dollar potentially bottoming out on the overall equity market and it is “not a great sign for the overall equity market, in our view”, the strategists said, especially if the dollar rebound is coupled with factors such as stalling economic data, as seen in the PMI reports last week in Europe, more EPS revisions, weaker oil price and bond yields remaining stuck in a range.
A recovery in the US dollar would be bad news for emerging markets, but if the euro has peaked its good neRead More – Source