UBS maintains neutral view on U.K. equities amid growth and currency headwinds

UBS Global Research maintains a neutral outlook on U.K. equities, forecasting a 3% earnings decline in 2025 after a cumulative 16% drop over the previous two years, with only a modest recovery expected from 2026. Despite a 3.7% prospective dividend yield, currency pressures from a strong pound, which impacts overseas earnings, and near-term economic uncertainty pose headwinds. The FTSE 100 is projected to decline to 8,500 by December 2025 before recovering to 9,000 by June 2026, with UBS favoring selective exposure to higher-quality, resilient stocks in sectors like IT, industrials, and real estate.

Analysis

UBS Global Research maintains a neutral stance on U.K. equities, reflecting a cautious outlook characterized by weak corporate earnings, currency pressures, and significant near-term economic uncertainty. U.K. corporate earnings are projected to decline by 3% in 2025, adding to a cumulative 16% contraction over the preceding two years, with only a modest 5% growth anticipated from 2026. The FTSE 100, standing at 8,874 as of June 16, is forecast to dip to 8,500 by December 2025 before a potential recovery to 9,000 by June 2026. A prospective dividend yield of 3.7% is seen as the primary driver of modest total returns. A key headwind is the recent strength of the pound, which negatively impacts the sterling value of overseas earnings for FTSE 100 companies, given that 75-80% of their revenues originate internationally. While rising oil prices, driven by geopolitical tensions, could offer some support to U.K. earnings due to the market's exposure to energy and materials, UBS expects 2025 profits to remain subdued. The base-case scenario points to stable but unspectacular performance, though downside risks include the FTSE 100 falling to 6,700 amid global trade disruptions and sticky inflation, while an upside scenario could see the index approach 10,000 with favorable trade deals and a weaker pound. UBS advises selective exposure, favoring higher-quality, resilient stocks in sectors like IT, industrials, and real estate, aligning with European policy initiatives such as increased infrastructure and defense spending. The overall sentiment from the report is neutral to slightly cautious, reflecting the fragile growth environment.

Key Decisions for Investors

• Maintain selective exposure to U.K. equities, prioritizing high-quality, resilient companies in sectors such as IT, industrials, and real estate, particularly those poised to benefit from European infrastructure and defense spending initiatives.
• Anticipate that total returns from U.K. equities in the near term will likely be driven by the prospective 3.7% dividend yield rather than significant capital appreciation, given the forecast for a 3% earnings decline in 2025.
• Closely monitor the strength of the pound sterling as a key risk factor, especially for FTSE 100 companies with substantial international revenue streams, and consider the potential for the FTSE 100 to decline to 8,500 by December 2025.
• Exercise caution in the near term due to prevailing economic uncertainties, the fragile growth outlook, and external pressures including trade tariffs and commodity price volatility, before committing to more aggressive U.K. equity allocations ahead of the projected 2026 earnings recovery.