Lloyds Bank, BT and Tesco shares make this 'best buy' list

A diverse bunch of stocks make this heavyweight broker's list of best equity ideas. Here are its UK tips.

After an awful fourth quarter of 2018, stock markets have staged a reasonable recovery since Christmas. But does this rally have legs, or will equities resume the downtrend begun last spring? 

Analysts at JP Morgan have been burning the midnight oil to outline their strategy for the coming months and unveil their list of European Best Equity Ideas. And there's plenty to like believes the broker.

It thinks the current situation has more in common with 2015-16 rather than the end of the cycle. Then, despite deteriorating markets and a plunge in emerging markets, cyclical stocks and commodities, the US avoided recession and China hit a new high within two years.

"What stopped the rot was the Fed pausing the hikes in March '16, US dollar peaking at the same time, and China stimulus coming through," explains the broker.

"The headwind from [Quantitative Tightening] is difficult to quantify, but QT is reversible, central banks are not forced sellers, and stand to support risky assets in case of sustained weakness, in our view."

What's more, China is progressively increasing stimulus and earnings are tipped to grow in 2019. Equity price/earnings (PE) ratios derated 15-20% last year and now appear "outright cheap".

Brexit has caused a specific set of problems here, and JPM is 'underweight' the UK. It explains: "UK is a defensive, high-dividend yielding market which might have a problem if bond yields move sustainably higher, and if global equities advance, as we expect."

However, the broker did recently upgrade UK domestic plays/homebuilders on a reduced risk of "No deal". Yet, it's the US that remains JPM's top pick in developed market equities.

"The US cycle to many investors appears long in the tooth, but the record high buybacks, still better earnings growth and the accelerating revenues growth favour US equities," write the analysts.

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Still, that should spell good news for UK stocks, given a strong US economy and momentum there drives the global economy and optimism elsewhere. 

And there are nine London-listed shares in JP Morgan's top 28 stock ideas in Europe.

Telecoms favourite BT Group (LSE:BT.A) (price target 290p) makes it on. So does miner Anglo American (LSE:AAL) (2,180p), caterer Compass Group (LSE:CPG) (1,730p), credit scorer Experian (LSE:EXPN) (2,000p), oil company Petrofac (LSE:PFC) (660p), rat catcher Rentokil Initial (LSE:RTO) (350p), oil major Royal Dutch Shell (LSE:RDSB) (2,700p) and budget airline Wizz Air (LSE:WIZZ) (3,750p). 

Highest profile of all is Lloyds Banking Group (LSE:LLOY) which, trading on less than 7 times forward earnings, is added to the list this time and is tipped by JPM to eventually hit 85p. 

A multi-year downgrade cycle saw BT shares crash 60%, but second-quarter results were encouraging, and cost cutting, a reducing pension deficit, and normalizing capital expenditure all support free cash flow and a decent dividend yield. JPM pencils in a 290p price target.

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There are some quality shares that didn't make the list. JPM likes Standard Chartered (LSE:STAN) for its emerging markets business which limits exposure to the eurozone. The bank's shares trade at a discount to peers, and there's also potential for positive earnings per share surprises.

Top pick for 2019 is housebuilder Persimmon (LSE:PSN), with almost 50% upside potential to the broker's price target of 3,250p. Supermarket Tesco (LSE:TSCO) is also a favourite, backed by JPM to hit 265p. The broker has turned buyer for the first time in five years as "cash flow, top line and balance sheet have improved and Booker adds new addressable market and strong execution capabilities with Charles Wilson now in the management team."

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It doesn't make the Best Ideas list either, but AstraZeneca (LSE:AZN) is still a JPM top pick in 2019, given it offers the fastest growth in the pharmaceuticals sector over both the near and longer term. Watch Vodafone (LSE:VOD), too. There are plenty of analysts backing the phone giant, and JPM has a 240p price target in place currently.