While Credit Suisse has retained an 'overweight' position in UK equities, the broker has trimmed its position to pay for its recent upgrade to Japan and picked out 'what to buy' in its London-listed coverage.

The broker said on Tuesday that the UK has "slipped on our composite regional scorecard".

"The FTSE 100 is a defensive market (by sector composition) and thus tends to underperform when economic lead indicators and global equity markets rise (we remain positive on equities and the global economy on a three- to six-month view)."

Nevertheless, Credit Suisse is still 'overweight' in the UK, saying it expects the sterling to weaken (given a near-record current account deficit) and a sharp slowdown in relative economic momentum. It explained that a weaker sterling supports the UK's relative performance as some 79% of earnings of companies come from outside the UK.

Furthermore, 90% of the sectors in the UK are trading below their global peers on a 12-month forward price-to-earnings ratio.

Meanwhile, the broker said that an extension of the Bank of England's Funding for Lending scheme could be on the cards (along with a possible mortgage-guarantee scheme), or a potential 'Funding for Infrastructure' scheme.

"This would likely drive up inflation expectations significantly. With nominal yields effectively capped, real yields would fall, leading to an asset allocation shift in favour of equities."

What to buy?

Credit Suisse said it likes cheap international earners such as Shire and Smiths Group as they benefit as inflation expectations rise. This also has positive implications for domestic real assets like real estate investment trusts and home-builders.

Meanwhile, as equity allocations rise, asset managers such as Aberdeen should also benefit from strong equity flows.

In contrast, weakness in the sterling and a possible higher inflation target by the Bank of England (after incoming Governor Mark Carney takes his post in July) would be negative for defensive stocks, the broker said, "especially expensive domestics (Sainsbury's and United Utilities).


BC

Related share prices
Sainsbury (J) (SBRY) share price
Smiths Group (SMIN) share price
United Utilities Group (UU.) share price
Shire Plc (SHP) share price
Aberdeen Asset Management (ADN) share price