UK Stocks: Comeback Contenders

 | Nov 26, 2019 05:24

As European investors show the most buying interest in UK shares for years, here are the stocks with the best—and worst—chances of strong gains, according to technical indicators

Context

The skies may be brightening for UK shares. Or at least investors are beginning to think so. A Bank of America (NYSE:BAC) Merrill Lynch survey of fund managers from earlier this month showed a net 9% of EU investors intended to overweight British equities, the highest in 5 years.

Likewise, Morgan Stanley (NYSE:MS) called British stocks “potentially the best global equity opportunity for 2020”, based on a view that hard-Brexit risks are fading fast, though only after battering relative UK stock market valuations to 30-year lows. Reduced bearish sentiment on chronically unloved UK shares also reflects better prospects that Britain could unsnarl its convoluted Brexit process. Improved global risk appetite on hopes for trade de-escalation helps as well.

Risks are hidden in plain sight, of course. See the recent stock market swings as prospects of a ‘phase one' deal have waxed and waned. For the FTSE 100, a slide in dividend growth to a fraction of the global average in Q3 may not bode well for sustained net inflows either. Still, we assume investors will tend to seek the best opportunities, even in a limited window of improved sentiment. So we decided to create a ‘screen’ of technical chart indicators with the aim of sifting out stocks with the most and least favourable near-term outlooks.

Methodology

  • Universe: FTSE All-Share index which includes FTSE 100, FTSE 250 and FTSE small cap stocks, totalling 628

  • 18 technical studies applied in weekly intervals between 18th October and 18th November

    • short/long-term moving averages, Average True Range, William's %R, Exponential Moving Average

  • Bullish signals scored 1, bearish signals -1. Scores were totalled and stocks ranked according to score

  • Scope was managed by selecting the top-40 and bottom-40 ranked equities

  • For sector classification, we adopted a combination of the Industry Classification Benchmark and Bloomberg’s BICS (link opens a PDF). Using both allowed a good balance between a system that was sufficiently descriptive but with broad enough categories to spot trends

    • Things to remember when looking at these results

  • Technical analysis is backward looking. Strictly speaking, it tells us nothing about future price action
    • Get The App
    Join the millions of people who stay on top of global financial markets with Investing.com.
    Download Now

  • We assume that as a snapshot of current conditions, technical indicators can offer clues about what might happen in the near future

  • Technical analysis is mostly a tool for interpreting current and recent price action

  • Technical indications may turn out to be misleading in practice. Note our methodology hasn’t been back tested

    • Key points from the results: Sectors

  • The general impression conveyed by the results was that so-called ‘value equity sectors’ (as opposed to ‘growth equity sectors’) were favoured. In other words, within the UK stock market, higher-yielding though relatively stable stocks are being favoured by investors over faster-growing less stable shares

  • The most frequent equities to emerge, even in our pared back selection were Investment Funds and similar vehicles. There are almost 190 such entities in the FTSE All-Share. The majority received a positive score in our screen. This gels with BofA Merrill’s finding of rising demand for exposure to UK stocks. But funds appeared among both positive and negative ranks. This denotes active selection within the UK market. Because of time constraints and limited space, we won’t go into further detail about funds. In any case, trends are easier to spot from single-stock sets than funds. On that basis, listed funds were removed from our finalised list, but distinct companies that operate funds were kept

    • Here is a breakdown of sectors/industries that were highlighted most frequently