UBS: UK Equities Fairly Valued, Less Growth Potential Than Global Markets

Overview of UK Equities#

UBS has assessed UK equities and considers them to be reasonably valued, with expected earnings growth over the next two years. However, the firm believes that UK stocks may have less potential for growth compared to global equities.

Current Valuation and Earnings Growth#

The FTSE 100, a key index of UK stocks, is currently trading at a forward price-to-earnings ratio of 12.7, which is close to its historical median of 12.8 since 1990. UBS expects earnings growth of 9-10% for this year, an increase from a previous estimate of 5%, largely due to rising oil prices. For 2027, they project similar earnings growth but have lowered their forecast from 15% as oil prices are expected to stabilize.

Influencing Factors#

This year, UK equities have been influenced by three main factors: an improving economic outlook with global manufacturing indicators reaching multi-year highs, concerns over potential disruptions from artificial intelligence (AI) leading to a shift from digital to physical sectors, and rising tensions in the Middle East affecting energy security. Despite being less cyclical than other markets, the UK has benefited from these trends, particularly due to its significant oil and gas sector.

Sector Preferences and Future Outlook#

UBS sees greater growth potential in cyclical markets that have faced recent challenges. They also note that energy stocks may lag behind oil prices, as these stocks have not kept pace with oil price increases in the past two years. UBS has upgraded the European healthcare sector to attractive, citing appealing valuations after a decline since the start of the Middle East conflict. Additionally, they favor sectors like European IT and industrials, which could benefit from a resolution of current conflicts and increased demand in various areas. The real estate sector is also viewed positively due to its attractive valuations. With a significant portion of FTSE 100 revenues coming from outside the UK, any reversal in the strength of the British pound could enhance returns for local investors.