BlackRock bullish on UK stocks after elections, Japan stocks are top play

By Davide Barbuscia and Karin Strohecker

NEW YORK/LONDON (Reuters) -The BlackRock Investment Institute (BII) said on Tuesday that recent parliamentary elections in Britain had made valuation of UK equities attractive, while Japan stocks remained its favoured equity investment play.

The British Conservative Party suffered a historic election defeat last week with a record number of cabinet ministers losing their seats.

"Valuation is very compelling ... and given the perceived political stability leading to better sentiment, we think there's a tactical opportunity for UK equities," Wei Li, global chief investment strategist at BlackRock, said on Tuesday.

BII, an arm of U.S.-based investment firm BlackRock that provides proprietary investment research, said in a mid-year outlook report that the prospect of higher-for-longer interest rates made inflation-linked bonds attractive. On a country level, Mexico and India should "benefit from rewiring supply chains in the long term," BII added.

BII is bullish on U.S. stocks and artificial intelligence, the report said.

"(Japanese equities are) our highest conviction equity view thanks to support from the return of mild inflation, shareholder-friendly corporate reforms and a Bank of Japan that is cautiously normalizing policy, rather than tightening," it said.

With regards to U.S. government debt ahead of the presidential election, long-term debt prices are not sufficiently reflective of the prospect of widening U.S. fiscal deficits, prompting BlackRock's preference for short- to medium-dated Treasuries, said Li.

Both U.S. presidential election front-runners, President Joe Biden and former President Donald Trump, are not prioritising a reduction in government spending, which could lead to wider term premiums, she said, referring to the compensation investors require for holding long-term debt.

"Both of these candidates are not really talking about plans that bring down fiscal deficits. They spend in different ways but they're both looking to spend," she said.

"We prefer the front end of the curve, the belly of the curve, over the long end ... because the U.S. term premium in particular does not reflect that fiscal trajectory," she added.

(Reporting by Karin Strohecker and Davide Barbuscia; editing by Dhara Ranasinghe and Rod Nickel)