There are a number of factors suggesting UK equities have further to rise now that Brexit has been done, with Jefferies highlighting five blue-chips which look particularly attractive.

UK equities have underperformed their international peers for much of the recent past because of the uncertainty that was created by the country’s decision to leave the EU.

Investors started to return to the UK market after the Conservatives won a significant majority in the December general election and prime minister Boris Johnson lived up to his pledge to “get Brexit done”.

Performance of indices over 5yrs

Source: FE Analytics

However, analysts at Jefferies noted that UK equities still look “significantly undervalued” despite this, with the FTSE 100 trading at a 14 per cent discount to Stoxx 600.

“Brexit is done but UK equities are not,” the bank said. “Fiscal and monetary policy, corporate and consumer sentiment, fund flows and valuation all support sustained UK equity outperformance. Downside risks from policy missteps remain priced in.”

Below, five Jefferies equity analysts highlight the FTSE 100 stocks that look undervalued and they believe are poised for strong performance from here.

Barclays

First up is multinational investment bank and financial services company Barclays, where Jefferies said return improvement prospects and capital repatriation are “currently under appreciated by the market”.

Jefferies equity analyst Joe Dickerson expects Barclays’ return on tangible equity (ROTE) to reach 10 per cent in 2020/21. On the capital repatriation front, the bank’s dividend per share was 9p in 2019 and is likely to be “progressive thereafter”, augmented by buybacks below book value.

“The market has been scrutinous of management’s commitment – of investment and balance sheet – to the less predictable, lower return, Corporate & Investment Bank,” Dickerson added.

“We believe this scrutiny is misplaced as the share gains in market wallet, combined with cost discipline, are a key contributor to group ROTE improvement.”

Offering reasons for conviction in the stock, the analyst said Barclays’ return improvement and capital repatriation are “the most visible they have been in 10 years” now that payment protection insurance, litigation charges, a vast restructuring programme and a more level playing field on CET1 capital have been addressed. In addition, its current price-to-book multiple of 0.6x offers “a margin of safety”.

BT Group

Jefferies’ Jerry Dellis highlighted telecommunications giant BT as another undervalued FTSE 100 stocks that looks attractive.

He argued that BT should have a dividend yield of 5 per cent (instead of today’s 10 per cent), owing to considerations such as its growing Openreach infrastructure asset being backed by supportive regulation and a pension scheme that is now well-hedged against real bond yield volatility.

Performance of stocks vs indices over 5yrs

Source: FE Analytics

“The market is cautious on FTTP [Fibre to the Premises] regulation, the implications of FTTP capex for BT’s dividend and consumer prospects,” he said.

“Current price discounts Openreach at £14bn RAB [regulated asset base]). We expect future FTTP regulation to encourage Openreach to grow its RAB and to permit a risk adjusted premium return on investment.”

Jefferies’ conviction in the stock is underpinned by Ofcom’s FTTP proposals making “key concessions” to BT (copper indexation, pricing flexibility based on building costs, copper retirement), as well as the firm’s decision to scale down its 2020 projects to allow it to work on FTTP without raising the whole group’s capital expenditure. Additionally, Jefferies thinks the Openreach asset will be worth £25bn.

Persimmon

York-headquartered housebuilding company Persimmon is the bank’s third stock pick, with equity analyst Glynis Johnson arguing that “substantial upside” remains in the share prices of UK housebuilders followed an extended period of underperformance.

“Persimmon’s 7.8 per cent dividend yield places it top 5 in the FTSE 100,” she added. “With a net cash balance sheet offering scope for capital returns to step up further, and upside to consensus forecasts, we see Persimmon as a key UK domestic and yield play.”

Johnson highlighted several reasons for conviction in the stock, including a strong cash position that “provides comfort” for its 7.8 per cent yield while offering the potential for ‘surplus cash’ being used to supplement this in future years.

Meanwhile, the analyst said 2020 could be the year where it returns to growth after management completed a programme to embed customer service at the heart of the group’s operations.

Furthermore, the housebuilder’s holding of freehold strategic land and strong record of purchasing attractive land for development through the open market have allowed it to build a solid competitive advantage.

SSE

Jefferies’ Ahmed Farman singled out energy company SSE as an attractive UK company for further post-Brexit upside, pointing to the potential for it to grow its capacity at a significant rate in the years ahead.

“SSE is a leading renewables player in the UK and Ireland, with 10GW project pipeline,” he said. “We see SSE’s installed wind generation capacity as more than doubling by 2025 and a 200p/share value benefit. SSE’s networks offer compelling RAV [regulated assets value] growth and re-rating potential, as concerns around its profits outlook ease.”

Jefferies expects SSE’s wind capacity will reach 5.3GW in the next five years, up from around 2.5GW currently, while earnings before interest, tax, depreciation and amortization is forecast to climb 50 per cent to £1.4bn over the same period.

Furthermore, the company’s five-year project pipeline could add 200p to the value of its shares, according to the bank’s estimates, with 190p/share coming from its Dogger Bank, Seagreen and Arklow Bank offshore projects and 10p/share from its subsidy-free onshore wind pipeline.

Tesco

Jefferies’ final stock pick is supermarket chain Tesco, which is the third-largest retailer in the world measured by gross revenues but has endured a tough time of late.

Equity analyst James Grzinic pointed to the company’s recent return to positive growth in like-for-like (LFL) sales as “an encouraging sign of sustainable progress in the UK”, which gives its a solid foundation for margin expansion in the potentially supportive post-election consumer environment.

Performance of stocks vs indices over 5yrs

Source: FE Analytics

Meanwhile, recent media coverage suggests that Tesco’s plans to dispose of Asian business is progressing. Bidding is allegedly underway with interest from domestic buyers; this disposal could result in earnings accretion of around 10 per cent if the proceeds are fully returned to shareholders.

“At a time of flat UK market growth, pre any real benefit from a revitalised consumer, Tesco’s Xmas return to a positive UK [like-for-like sales] should help reassure about the ongoing attractions of the offer and consequent volume outperformance,” Grzinic said.

“With significant self-help cost levers, a renewed loyalty programme driving customer engagement and a strongly accretive Asian exit progressing potentially on the cards, we stay on buy.”