• The FTSE 100 was one of the worst-performing major indexes in Europe in September. However, UK investment bank, Barclays, in a research note, said stocks in the UK region were cheap and under owned. 
  • The UK market is “foreign exchange sensitive” and with the GBP likely to be choppier due to Brexit uncertainty, Barclays predicts the FTSE 100 will improve, which could create opportunities for investors.
  • Barclays outlines seven UK stock picks with catalysts in the fourth quarter and two stocks to sell.
  • “Our seven OW-rated stocks have an average upside to our PT of 26%; whilst our two UW-rated stocks have an average downside to our PT of -27%,” said Barclays’ equity analyst, Richard Taylor, in the note.
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The FTSE 100, the UK stock index that tracks the biggest 100 companies on the London Stock Exchange, was one of the worst-performing major indexes in Europe in September.

UK assets were hit hard due to a surge in COVID-19 cases in Britain, along with tighter restrictions on movement and renewed concerns over Brexit. 

FTSE 100 index on October 9

FTSE 100 index on October 9

Business Insider Markets

However Barclays, the British investment bank, still sees opportunities within the UK.

Until last month, the bank had an underweight rating on the UK but this has now switched to medium-weight.

In an October 8 research note, the bank acknowledged that the uncertainty of Brexit combined with “waning” fiscal support could leave the UK with slower recovery. However, with the UK being a foreign exchange sensitive market, the pound is likely to be choppier due to uncertainty around Brexit, which could help with the FTSE 100’s poor performance and create opportunities for investors.

“The [UK] region is under owned, cheap

“Risk comes from not knowing what you’re doing.” – Warren Buffett

One upcoming catalyst for bank stocks is a second round of stress tests. Usually only one round per year is needed, but with continued uncertainty, further scenarios will be examined. After the second round, the Federal Reserve plans to publish firm-specific results, a deviation from standard policy where only aggregate performance is released, proving to be an interesting catalyst for the bank stocks.

June 2020 release

Recall the Federal Reserve released the results from the first round of stress tests in June 2020. The results indicated all banks had sufficient capital to withstand the scenarios considered at that time.

However, the possibility of large losses could not be overlooked and the Federal Reserve felt it was prudent to take actions to preserve capital. As a result, share repurchases were disallowed and bank dividends were capped at the current level. The prohibitions were put in place through the third quarter, though I expect them to be extended until the second round of stress tests is completed.

Second stress test scenarios

Two hypothetical scenarios will be considered in the upcoming round of stress tests. The first scenario is shorter, but harsher, as by the end of 2021 unemployment has jumped to 12.5%. A partial improvement comes sooner as unemployment falls to 7.5% in 2023. The GDP decline is roughly 3% through 2021. This is the “severely adverse” scenario.

In the “alternative adverse” scenario, the economic metrics do not worsen as much but stay lower for longer. Unemployment rises to 11% by the end of 2020 and then only declines to 9% in 2023. The GDP decline is lower at 2.5%. In the chart below, the unemployment rate for each scenario is shown.

Source: Federal Reserve

For comparison purposes, note the most