By Carla Mozee, MarketWatch Stay underweight U.K. stocks, says Morgan Stanley

LONDON (MarketWatch) -- U.K. stocks were pulled lower Monday, led by losses for natural resource producers following disappointing Chinese data and on fallout from inaction in the oil industry by the Organization of the Petroleum Exporting Countries.

U.S. crude-oil futures (CLF5) posted mild gains but still hovered near their lowest level in more than four years, leaving oil stocks to take another beating after OPEC on Thursday failed to agree to an output cut. Read: OPEC might get the last laugh on oil.

Tullow Oil PLC dropped the most on the FTSE 100, losing 6% as the shares were downgraded at J.P. Morgan Cazenove to neutral from overweight. Energy engineering firm Weir Group PLC lost 2.5% and BP PLC ended 1.4% lower.

Oil issues along with mining stocks felt the weight of soft manufacturing data from China, a major buyer of commodities. HSBC said its China purchasing managers index fell to a six-month low of 50.0 in November. Meanwhile, China's official PMI fell to 50.3, the lowest level since March. In the mining group, BHP Billiton PLC (BHP) declined 2.2%, Anglo American PLC lost 1.3% and Rio Tinto PLC (RIO) fell 1.2%.

But marking a turnaround were shares of BG Group PLC as they finished up 0.5%. The oil and gas services provider has decided to cut the planned pay package for incoming chief executive Helge Lund by roughly 53% to about 4.7 million pounds ($7.35 million). The move comes after shareholders pushed back on the size of the compensation deal.

The FTSE 100 dropped 1.1% to 6,656.37, wiping out last week's rise of 0.4%.

On the FTSE 250 index, shares of Balfour Beatty PLC jumped 4.3% after John Laing Infrastructure Fund Ltd. made a GBP1 billion bid ($1.57 billion) for the construction company's investment arm.

Investors in U.K. stocks should remain underweight against the European market as the underperformance in U.K. earnings and equity prices this year looks set to continue, said Morgan Stanley, as part its 2015 strategy released Monday. Per-share earnings are likely to rise 4% next year compared with growth of 10% for the wider European market. "Sector composition is part of the problem" as commodity sectors account for 24% of the U.K market versus 16% for broader Europe market, said Morgan Stanley. Read about Morgan Stanley's outlook for central banks in 2015.

Sterling: As for the pound (GBPUSD), HSBC said it's become even more bearish than before as the currency faces the issues of a later-than-anticipated rise in U.K. interest rates, heightened political risk ahead of the May 2015 general election and imbalances on both the trade and fiscal fronts. "This potent cocktail of cyclical, political and structural drivers should ensure GBP remains on wobbly legs beyond the festive season, with further weakness likely to ensure the consensus is once again too upbeat," wrote HSBC strategist David Bloom in a report Monday.

HSBC expects the pound to finish 2015 at $1.48 versus its previous forecast of $1.55, and further weakening in 2016 to $1.45.

The pound on Monday gained ground following data released Monday showing the U.K. manufacturing sector expanded in November. The pound bought $1.5734 compared with $1.5683 ahead of the data. Markit and the Chartered Institute of Procurement & Supply said their manufacturing purchasing manufacturers index rose to a four-month high of 53.5 in November. Analysts had widely expected a reading of 53.0.

"The domestic market is this month's stimulus of growth, supporting continued stability and a good level of confidence," said David Noble, group chief executive at CIPS, in a statement "Though progress is not as robust as in the first half of the year, balance is being restored as output, orders and employment levels all rise at moderate if unexciting rates."

The manufacturing report came ahead of Wednesday's Autumn Statement, to be delivered by Treasury chief George Osborne "against a background of a recovering U.K. economy, but a continued deterioration in the fiscal position," said Ian Williams, economist at Peel Hunt, in a Monday note.

Net borrowing by the government is running ahead of forecasts, and higher than last year's level, largely because of a shortfall in tax receipts as wage growth lags broader improvement in activity," wrote Williams.

You're invited: A free evening event focusing on investing opportunities in Europe

Will you be in London on Dec. 3? Then you're invited to our MarketWatch Investing Insights event, "The Worse Europe Gets, the More You Should Invest."

Governments are in trouble, reform efforts have stalled, unemployment is climbing. The news from the eurozone is bleak, and investors are fleeing. But that's a mistake: The worse the economic data from Europe get, the more you should be buying. Why? Because actions by the ECB will boost asset prices and the stock market in particular. And, big exporters can grow sales. Lower costs and steady sales translate into higher profits and dividends. Join us for an evening of cocktails and conversation to explore these opportunities.

Our panel will be led by MarketWatch columnist Matthew Lynn, a renowned financial journalist based in London and the author of "Bust: Greece, the Euro and the Sovereign Debt Crisis." He'll be joined by Mark Hulbert, MarketWatch columnist and editor of the Hulbert Financial Digest.

This event is free, but RSVPs are required. It will be held Wednesday evening, Dec. 3, in London. For more information or to RSVP, send an email to marketwatchevent@wsj.com.

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