Companies with overseas and especially emerging markets exposure such as international banks, miners and tobacco producers are the way to play the UK's next economic phase, Citi said on Tuesday, picking a 'sweet 16' large and small cap stocks to buy, including AstraZeneca, Bellway and Keyword Studios.
"The world has shifted from a prolonged period of mixed and disappointing growth to a new phase of synchronised global growth," Citi said in a note to clients. "At the same time, the pre-Brexit UK economy has slowed."
Overall, the backdrop for UK companies is mostly positive, apart from those exposed to domestic consumption.
Citi prefers themes and individual stock-picking in the UK over sector allocation, such as taking an 'overweight' stance on banks, but preferring international over domestic UK lenders.
Investment intentions tilt towards emerging markets exposure and away from domestic exposure, with banks, mining and tobacco three sectors which score well on this model and all 'overweight', while utilities, oil & gas and beverages score less well and are 'underweight'.
The 'UK sweet 16' individual stocks are rated 'buy' by analysts for perceived potential alpha, including several blue chips, a handful of mid-caps and one from AIM.
AstraZeneca was number-one pick for its "underappreciated" immuno-oncology and targeted therapy portfolios; followed by British American Tobacco for strong sales and potential upside from next-generation such as Heat Not Burn; and Experian for superb cash generation and improving momentum as Latin American recovers.
Johnson Matthey is seen as unfairly out of favour due to worries about diesel and has potential in batteries; Merlin Entertainment is expected to deliver long-term double-digit earnings growth; Rolls Royce's cash generation is seen recovering in a "very counter-consensus" recommendation; Shire suffers from an "overly bearish" share price in light of forecasts for rapidly falling debt and rapidly growing earnings.
Standard Chartered is another non-consensus recommendation as analysts see a recovering profitability story for a "de-risked bank" in a growing Asian corporate banking industry trading at a discount to regional peers; Standard Life Aberdeen is picked for potential cash returns and EPS growth from the merger benefits; although for WPP 2017 is a "lost year", next year should see a tailwind for account wins plus M&A, buybacks and FX.
On the FTSE 250, Bellway's valuation is "relatively attractive" given it's a quality company in a sector where long-term fundamentals are "solid"; Just Eat has UK leadership and international at a tipping point; PageGroup is underrated as consensus "seems too low"; Restaurant Group is expected to improve margins and keep generating cash; while UBM has "one of the most attractive models within the media sector" plus growth accelerating in 2018 and M&A optionality.
AIM-listed Keywords Studios is felt to be ensconced in an industry with strong dynamics and shifting to outsourcing, with cross-selling and M&A to drive EPS growth.