UBS Global Research has reiterated a neutral stance on U.K. equities, citing weak earnings growth, currency pressures, and heightened near-term economic uncertainty.
Despite a more positive medium-term outlook for Europe, analysts at UBS advice selective exposure to the U.K. market.
U.K. corporate earnings are forecast to decline by 3% in 2025, following a cumulative 16% drop over the past two years.
A modest recovery is expected from 2026, with projected earnings growth of 5%. However, UBS cautions against looking too far ahead, given the fragile growth environment and external pressures, including trade tariffs and commodity price fluctuations.
The FTSE 100, which stood at 8,874 as of June 16, is projected to decline to 8,500 by December 2025 and recover to 9,000 by June 2026.
The index offers a 3.7% prospective dividend yield, which UBS views as contributing to modest total returns from current levels.
Currency movements remain a central concern. With 75–80% of FTSE 100 revenues derived from outside the U.K., the recent strength of the pound poses a risk by reducing the value of overseas earnings when converted back to GBP. UBS identifies this as a key headwind for U.K.-listed companies.
Commodity markets are also under scrutiny. Rising oil prices, driven by geopolitical tensions in the Middle East, could offer some upside for U.K. earnings, given the market’s significant exposure to the energy and materials sectors. Still, UBS expects 2025 profits to remain subdued despite these developments.
In its base-case scenario, UBS expects stable but unspectacular performance from U.K. equities, supported primarily by dividend yields rather than capital appreciation. A downside scenario includes the FTSE 100 falling to 6,700 amid global trade disruptions, sticky inflation, and falling commodity prices.
On the upside, a combination of trade deals, improved investor sentiment, and a weaker pound could push the index closer to 10,000.
Analysts favor higher-quality, resilient stocks across sectors with structural growth drivers.
Preferred sectors include IT, industrials, and real estate, aligning with UBS’s “Six ways to invest in Europe” strategy, which targets single-stock opportunities benefiting from European policy initiatives such as increased infrastructure and defense spending.
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