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(Bloomberg) — The UK stock market is defensive and tilted to commodities, making it less appealing as geopolitical tensions abate, according to Citigroup Inc. strategists.
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The team led by Beata Manthey double-downgraded the country to underweight from overweight in their global asset allocation, preferring exposure to US and Japanese peers. Europe, excluding the UK, was kept at a neutral rating.
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“Although valuations remain attractive, the market’s defensive and commodity-heavy composition is less appealing in an environment where earnings growth and market leadership are broadening,” the team said of UK equities. “We continue to favor more cyclical opportunities elsewhere.”
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London’s FTSE 100 index was an outperformer until mid-April, benefiting from its 10% weighting in energy stocks through BP Plc and Shell Plc as the Iran war buoyed oil prices. Meanwhile, the benchmark’s allocation to defensive sectors such as healthcare and consumer staples is almost 35%, making it a relative haven in times of geopolitical tensions or economic downturn.
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Since a US-Iran ceasefire was announced on April 8, the FTSE 100 has been a major laggard, falling 1%, while its euro-area blue-chip peer Euro Stoxx 50 advanced by about 6%, and the S&P 500 jumped nearly 12%. Japan’s Nikkei 225 soared 20% over the same period.
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For Manthey and her team, the UK market “serves as an effective geopolitical hedge” within equity portfolios. The strategists said they still like some sections of the market, citing banks, basic resources and healthcare. “Given economic uncertainty, we prefer FTSE 100 over FTSE 250,” which is more domestically focused, they added.
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