Morgan Stanley says that British companies are among the most affordable in the world, as a “very gloomy’ sentiment towards the UK has led to steep discounts on debt and shares.
Analysts from the American Investment Bank said that UK assets, which were already very cheap, had been further discounted due to investor resistance. This left British bonds and stocks the cheapest in terms of the returns they produce.
In a client note, Graham Secker and his colleagues stated: “The mood towards UK assets is very gloomy right now.”
Analysts said that UK stocks were cheaper for a long time than other assets with similar yields around the globe, but their prices have dropped even more in the last five to ten years.
International investors have blamed the Brexit, recent political turmoil and last year’s disastrous mini Budget for scaring them away.
Britain’s persistently high rate of inflation has also proven to be a barrier in attracting foreign money.
Mr Secker and his colleagues stated: “The UK is currently concerned about the perception of high inflation, and the need to increase interest rates (and the subsequent slowdown in growth).”
In May, inflation in the UK remained at 8.7pc and fell much slower than in other similar economies.
The Bank of England is expected to increase interest rates by early next year from their current level of 5% to 6.25%. Mr Secker, along with his colleagues, said that Britain was likely to face a challenging autumn as the higher rates would hit the real economy. However, they did not call it a recession.
British stocks are also the worst performers so far in Europe this year, which is a blow to attempts to attract investment. The British market has lagged behind its rivals due to a relative lack of technology firms.
Morgan Stanley’s report will only exacerbate the fears that London is losing its competitiveness.
The influential fund manager Nick Train and the co-founders of Lindsell Train called Britain’s market “backwater” earlier this season. Mining giant WE Soda criticized “extreme investor caution” in London when they scrapped their plans to list last month.
The government is focusing on boosting the British economy and Jeremy Hunt, who will announce plans for encouraging pension funds to support UK-based companies, will do so on Tuesday.
Despite widespread pessimism regarding UK assets, Secker stated: “It is worth noting that the actual economic trends are more optimistic.”
This narrative could change quite significantly over the next few month if input and output prices start to fall.
He said that if inflation began to drop rapidly, investors might be drawn to British assets. Wall Street giant, said that the UK’s most attractive stocks include BAE Systems and Ashtead.
Morgan Stanley predicts that inflation will fall significantly in the second half this year.