(Bloomberg) -- Goldman Sachs Group Inc (NYSE:GS). strategists believe 2020 bodes well for U.K. equities -- with a few caveats.
“In 2019, U.K. assets have done well as risks have receded,” said Goldman strategists led by Peter Oppenheimer. “For 2020, we expect the outperformance to continue as the U.K. delivers better growth.”
U.K. stocks outperformed the European benchmark at the end of last year after the decisive victory of the Conservatives fueled optimism that the government can complete Brexit and end the uncertainty that has repelled investors. Prime Minister Boris Johnson meets with the European Commission President Ursula von der Leyen on Wednesday to discuss a free-trade agreement, which he wants to conclude by the end of 2020.
Goldman strategists are particularly keen on U.K. stocks with domestic exposure in light of the labor market’s resilience and increased political clarity, and predict the narrowing of their 20% valuation discount to international peers. At the same time, they recognize that the upside from current levels is limited and many risks persist.
“Our outlook remains subject to significant risks, in particular the scope and timing of negotiations on the U.K.’s future relationship with the EU, and the ability of the U.K. economy to recover from the current slump,” the strategists said.
European Union leaders have warned it’s highly unlikely that negotiators will be able to complete the kind of trade deal Johnson wants in the 11 months between Brexit day on Jan. 31 and the December deadline. This sets up a fresh potential cliff-edge for a no-deal split at the end of 2020, although this isn’t Goldman’s base scenario.
Investors have been putting their cash into both domestically and internationally-oriented U.K. stocks by piling into exchange-traded funds. The iShares Core FTSE 100 UCITS (LON:ISF) ETF has seen about 27 million pounds ($35 million) in new inflows so far this month, while the Vanguard FTSE 250 UCITS (LON:VMID) ETF has attracted about 17 million pounds after seeing a record inflow of 661 million pounds in December.
Bloomberg Intelligence’s Tim Craighead also added his vote of confidence for U.K. equities, saying that amid the flare-up in Middle Eastern tensions, the FTSE 100 can provide “a safe haven” because of its skew to energy and defensive equities.