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UBS predicts UK stock market and pound rally in 2021

Kumutha Ramanathan
·Contributor
·2 min read
The Brexit trade deal that was brokered last Thursday has made UBS more bullish on UK equities. Photo: Getty
The Brexit trade deal that was brokered last Thursday has made UBS more bullish on UK equities. Photo: Getty

Analysts at UBS (UBS) have made a bullish prediction for the UK stock market and sterling pound in 2021 following the Brexit deal. The bank said in a note on Tuesday that the outlook has never been brighter.

“The UK is one of our favoured global equity markets, particularly from an unhedged perspective as we suspect a large proportion of the return for international investors will come from the strengthening currency – our FX strategists target GBP/USD 1.44 by end-2021,” said Nick Nelson, head of European equity strategy at UBS, in a research note.

“Including the 3.9% dividend yield, this would point to a 21% total USD return from the current level of the FTSE 100 (^FTSE).”

The outlook would have been much worse in a no-deal scenario, said UBS, “we would have had a far weaker GBP, and in USD terms, UK equities would not be a favoured market.”

UBS created an Evidence Lab’s Deep Theme Explorer to gauge sentiment around Brexit and track the major sectors and stocks that have been the most exposed over the last few years.

WATCH: EU Lawmaker McAllister on Brexit, Financial Services

Through this research, it found an upside to UK equities, with a positive correlation to net Brexit sentiment, particularly to those with more exposure to domestic cyclical shocks, such as Barratt (BDEV.L), Bellway (BWY.L), and Lloyds (LLOY.L).

On the flip side, those with international exposure, such as Glaxosmithkline (GSK.L), Unilever (ULVR.L) and Reckitt Benckiser (RB.L) outperformed when there was negative sentiment.

UBS' research shows the net Brexit sentiment over the past two years. (Chart: UBS Research)
UBS' research shows the net Brexit sentiment over the past two years. (Chart: UBS Research)

UK’s leading index, FTSE 100, had hit a nine-month high on Tuesday, its first trading day since the Brexit deal was clinched. Other than UK banking stocks (the deal didn’t clarify how financial services would be impacted), all other sectors benefited from improved investor sentiment, which is also partly due to the US House of Representatives approving an increase in stimulus payments to help the country get back on its feet in the wake of the COVID-19 pandemic.

READ MORE: Nearly '80% of UK adults' will carry debt into 2021

Diageo and other drinks makers were among the greatest gainers on the FTSE (^FTSE) as they stand to benefit from the UK brokering its own international trade deals, opening up new markets and no longer being hampered by EU taxes and regulation.

WATCH: European stocks extend Brexit deal gains