Beaten-down UK stocks set for a big bounce

UK stocks shrugged off this week’s new lockdown. And provided the vaccination campaign goes ahead smoothly, traders will remain bullish. 

“The darkest hour is just before the dawn,” says Rupert Thompson of Kingswood. British shares shrugged off this week’s new lockdown, with the FTSE 100 gaining almost 2% in the first two days of the year. The short-term news is dire, but investors are concentrating on the vaccine rollout, which should pave the way for a return to normal. Provided the vaccination campaign continues without any serious glitches then traders will remain bullish. 

The Brexit deal was met with relief. With no-deal uncertainty finally out of the way another key headwind has been removed for UK shares. The index has plenty of room to rise after turning in an abysmal performance last year, falling by 14.3% for its worst showing since 2008. The FTSE 100 has underperformed for some time, notes Stefan Wagstyl in the Financial Times. Since 2016 it has gained less than 8%, compared with a 44% rise in German markets. British shares finally picked up in October, with the FTSE 250 up by 22% since then. That isn’t just vaccine euphoria. It also reflects hope that with the post-Brexit outlook clearer business investment will soar. 

There are other reasons for cautious optimism about 2021, says David Smith in The Sunday Times. Powered by Asian dynamism, the global economy will provide a benign backdrop this year. British consumers have amassed huge involuntary savings, which are likely to spark a spending boom. 

Unemployment should peak at a lower level than during previous downturns thanks to the furlough scheme. A brighter profits outlook could spark new interest in UK equities. As Stephen Innes of Axi points out, valuations are currently “close to 20-year lows” compared with Europe. Our “beaten-down” stocks could be “set for a magnificent recovery”.

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