By Barbara Kollmeyer
While treading water on Wednesday, the FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX -0.31% has had an impressive performance in 2021 thus far, as investors have shifted into companies that could prosper while COVID-19 vaccines drive economic recoveries.
The index /zigman2/quotes/210598409/delayed UK:UKX -0.31% is up 4.5% for the year, versus a 2.6% rise for the Stoxx Europe 600 /zigman2/quotes/210599654/delayed XX:SXXP -0.78% and 1.3% for the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.95% .
Those so-called value plays, such as mining and energy stocks, are heavily represented on the U.K. index. Heavyweights BP /zigman2/quotes/202286639/delayed UK:BP +1.82% /zigman2/quotes/207305210/composite BP +2.84% , Royal Dutch Shell /zigman2/quotes/206428183/delayed UK:RDSA +1.68% /zigman2/quotes/205095589/composite RDS.A +3.35% and Anglo American /zigman2/quotes/201381512/delayed UK:AAL +0.92% /zigman2/quotes/201381512/delayed UK:AAL +0.92% have all seen double-digit gains for the few days of trading in 2021 so far.
A “cheap reflation play, with a defensive hedge,” is how strategists at Barclays describe U.K. equities right now, as they upgraded the asset class to neutral or marketweight, “after an awful 2020,” in a note to clients on Wednesday.
“Defensive sector weights make the U.K. an unlikely outperformer, but provide a hedge. Brexit will hit GDP for years to come and U.K.’s COVID outcome is amongst the worst, but consequently it could see a bigger activity rebound if vaccines succeed,” said a team led by Emmanuel Cau.
“Global PMs [portfolio managers] have shied away from U.K. exposure over the last four years. This was mostly due to the binary tail risk of a ‘crash-out’ outweighing the attractiveness of U.K. assets, but also because tech/growth-heavy indexes were the only place to be,” said the strategists. “The U.K. is relatively cheap and under-owned but this has begun to reverse, with domestic plays and GBP seeing a bid lately. “
As for the sectors they like, the strategists highlight commodities, financials, industrials and discretionary stocks, and say avoid health care, staples, telecoms and real estate.
Their overweighted stocks include energy giant BP /zigman2/quotes/207305210/composite BP +2.84% /zigman2/quotes/202286639/delayed UK:BP +1.82% , miner Anglo American /zigman2/quotes/201381512/delayed UK:AAL +0.92% , mining equipment group Weir /zigman2/quotes/201865002/delayed UK:WEIR -1.35% , outsourcing group Serco /zigman2/quotes/202143031/delayed UK:SRP -1.85% , low-cost airline Wizz Air /zigman2/quotes/210449062/delayed UK:WIZZ -5.47% , home builder Redrow /zigman2/quotes/206663416/delayed UK:RDW -0.25% , catering group SSP /zigman2/quotes/205370875/delayed UK:SSPG -1.98% , bakery chain Greggs /zigman2/quotes/205743109/delayed UK:GRG -2.42% , antivirus software group Avast /zigman2/quotes/203787462/delayed UK:AVST -1.59% , global advertising group WPP /zigman2/quotes/202300097/delayed UK:WPP -0.20% /zigman2/quotes/203813176/composite WPP +2.31% , direct marketer 4imprint Group /zigman2/quotes/207133667/delayed UK:FOUR -1.97% , telecom BT /zigman2/quotes/209006687/delayed UK:BT.A +4.93% , drug company AstraZeneca /zigman2/quotes/200304487/composite AZN +1.76% /zigman2/quotes/203048482/delayed UK:AZN +0.01% , medical products and technologies company ConvaTec /zigman2/quotes/204036468/delayed UK:CTEC +3.02% , grocer Tesco /zigman2/quotes/203761082/delayed UK:TSCO +2.14% , tobacco giant Imperial Brands /zigman2/quotes/208789104/delayed UK:IMB +0.43% , consumer-goods group Unilever /zigman2/quotes/204685760/composite UL +1.01% /zigman2/quotes/205449809/delayed UK:ULVR +0.96% , electricity and gas manager National Grid /zigman2/quotes/208805676/delayed UK:NG -0.14% /zigman2/quotes/204048449/composite NGG +0.49% , Lloyds Banking Group /zigman2/quotes/200709414/composite LYG +1.82% /zigman2/quotes/202285510/delayed UK:LLOY -0.67% , Legal & General /zigman2/quotes/201125471/delayed UK:LGEN -0.92% , private equity and venture capital group 3i /zigman2/quotes/202254899/delayed UK:III -0.39% and property investment and development group Segro /zigman2/quotes/205428601/delayed UK:SGRO -3.03% .