Investing.com — UBS maintained a “neutral” rating on UK equities, citing the market’s heavy tilt toward energy and limited structural growth exposure as the primary obstacles to a more bullish stance.
The closed at 10,254.81 on June 10. UBS targets the index at 11,000 by December 2026 and 11,300 by June 2027, with an upside scenario of 12,300 and a downside scenario of 7,700 by June 2027.
Valuations are not the constraint. The market trades at 12.4 times forward earnings, just below its median of 12.8 times since 1990, and UBS forecasts earnings growth of 11% this year, up from an initial projection of 5%, and 10% in 2027.
The broker attributes the upgrade largely to a surge in oil prices, with commodity sectors accounting for roughly 20% of FTSE 100 earnings.
That commodity dependence cuts both ways. “Low commodity prices could hurt overall earnings growth, as the commodity sectors contribute around 20% of FTSE 100 earnings,” the broker warned, while also flagging that prolonged energy disruption in the Middle East could weigh on growth and push bond yields higher.
The UK market’s limited industrial exposure is another brake on enthusiasm. UBS expects a broad manufacturing recovery underpinned by artificial intelligence, electrification and defense spending, but notes the FTSE 100 is underweight industrials and therefore less positioned to capture that upside.
The gap between headline and underlying performance is stark. The FTSE 100 has risen 17.4% over the past 12 months, yet the median stock in the index is up just 8.8%, the bank said, a divergence that reflects narrow market leadership rather than broad-based strength.
With 75% to 80% of FTSE 100 revenues generated outside the United Kingdom, currency movement remains a live risk. Sterling strength would reduce the value of foreign earnings when translated back into pounds, the note said.
UBS said it prefers markets that are either more cyclical, in the event of a quick resolution to energy supply disruptions, or carry higher structural growth exposure than the UK offers.
Within the region, the analysts favor consumer discretionary, health care, industrials and real estate, alongside its European Leaders and Luxury & Lifestyles investment themes.
On rates, UBS holds a more dovish view than current market pricing and said real estate stocks stand to benefit if central banks raise rates by less than expected.
Leave a comment