LONDON (Reuters) - Goldman Sachs strategists said domestic-facing UK midcap <.FTMC> stocks are not fully reflecting the worsening in the economy since the referendum, leaving them vulnerable relative to the blue-chips on the FTSE 100 <.FTSE> that are likely to benefit from a further weakening of the sterling.
UK construction shrank at its worst pace in seven years last month while manufacturing suffered its sharpest contraction since February 2013.
All but three of 49 economists polled by Reuters expect the Bank of England to cut interest rates by at least 25 basis points on Thursday as it looks to ward off a sharp slowdown.
Still, the UK midcaps index last week recovered all their losses in the aftermath of the Brexit vote.
Goldman said in a note to clients this performance does not reflect the worsening in manufacturing data and domestic-facing stocks are likely to see earnings downgrades ahead.
The U.S. bank was more optimistic on the FTSE 100 <.FTSE> which it sees as a key beneficiary of a weaker sterling. In U.S. dollar terms, the UK midcaps index is still down 11.6 percent from its pre-referendum result close.
Goldman maintained their view that sterling would drop to $1.20 <GBP=D4> in three months' time, and then recover slightly to $1.25 in twelve months.
(Reporting by Vikram Subhedar and Jemima Kelly, Editing by Andrew Heavens)