UBS stays neutral on UK equities; earnings recovery likely slow

Investors should take care when investing in UK equities, according to UBS, as although the underlying macroeconomic backdrop remains supportive, the earnings recovery is likely to be slow.

The Swiss bank maintained a neutral rating on UK equities.

The underlying macroeconomic backdrop is currently supportive with domestic GDP growth recovering, earnings bottoming, and the Bank of England having started to cut interest rates, analysts at UBS said, in a note dated Nov. 21. 

But there are risks on the horizon from higher tariffs, and the recent move up in bond yields on the back of the US election is an incremental headwind to valuations. 

Given an uncertain economic outlook, investors searching for growth may continue to focus on structural themes, such as AI, to which the UK equity market has limited exposure.

The FTSE 100 's current forward P/E valuation of 11.4x remains at a discount compared to its long-run average of 12.8x, and earnings appear to be bottoming out. But we now see a slower earnings recovery than before, and forecast -3% earnings growth in 2024 (previously 0%) and +5% in 2025 (previously 7%). 

This is in part due to softer commodity prices, disappointing sales to China, and risks to global growth from higher trade tariffs, which are possible under the new US administration. 

“We also believe that headline UK equity valuations are not as attractive as they first appear, as much of the value remains in financials (8.4x forward P/E) and energy (8.1x forward P/E), where earnings could be at risk from weak oil & gas prices as well as falling interest rates,” UBS said.

“We advise broad-based exposure to the UK, with a tilt toward our European sector preferences (IT, consumer staples, and utilities),” UBS added.

 

Source: Investing.com