UK equities look overbought, says Credit Suisse

Since April, UK equities have outperformed euro area stocks by around 3% and global stocks by around 1%, but with oil prices felt to have peaked and shares looking "overbought", Credit Suisse strategists have downgraded their stance.

The Swiss bank downgraded its stance on UK equities to 'benchmark' from 'overweight', having upgraded at the end of April, and picked out a handful of stocks that have expensive valuations, negative earnings revisions and are rated 'underperform', namely Croda, Meggit, Intertek, Rotork, and Hargreaves Lansdown.

Part of the downgrade stemmed from the prediction that sterling is likely to remain supported as Britain will be able to achieve "relatively soft Brexit". The pound is "circa 20% cheap" versus the dollar and, with UK GDP growth outlook seeming to be stabilising, the strategists noted that sterling speculators are short and that "UK equities have done better than the weakness of sterling would have suggested since our upgrade".

The strategists have also taken a more cautious view on commodities, which represents around a quarter of the FTSE 100 market cap. They note that UK equities tend to outperform as the oil price rises but declared that "oil has peaked" and that, furthermore, Chinese money supply data "is consistent with much weaker commodity prices".

"The UK market is now overbought: The equity market underperforms 70% of the time this happens."

However, there were some UK stocks that were screened positively as cheap, with positive earnings revisions and rated 'outperform' are Ashtead, BP, Imperial Brands and ITV.